Did you know that you might be able to increase the chances of successful retirement by changing when you turn on your Social Security?
I’d like to remind our readers that everyone’s personal situation is unique and this is just an example to highlight a concept.
In the example, we looked at 4 different scenarios of when to turn on Social Security.
The only thing we changed in our scenarios was when to start Social Security. Not how much income to live on, not saving more, not investing differently – only looking at when to start Social Security.
And by changing when we turned on Social Security we were able to significantly increase the chances of successful retirement.
Before we get into the scenarios, we need to talk a little bit about Monte Carlo simulations and how they can help you evaluate your retirement plans.
Monte Carlo Simulations & Successful Retirement
Monte Carlo simulations are a part of a complex analysis done by a computer program that can be used to calculate the probability of a successful retirement. The program looks at thousands of different possibilities based on your investments and historical returns and comes out with a probability of success.
The ‘scores’ of the Monte Carlo simulations come out as percentages. And the higher the number the better. For example, if Scenario A has a 60% chance of success, and Scenario B has a 80% chance of success; Scenario B is better.
Nothing can predict the future. Monte Carlo simulations are not perfect, but they can be a useful tool to help us look at different aspects of your retirement plan.
Starting Social Security
Social Security will likely be an important part of your income in retirement. While you may be eligible to turn on your Social Security at age 62 – the amount you would receive will increase the longer you wait before you turn it on.
For example, if you turned on your Social Security at age 62, you might get $750. But if you waited until age 63, you would get $800. Let’s say your full Social Security age is 66 – at 66 you would get $1,000. But if you waited until you turned 70, you would receive $1,320.
Your benefit will depend on your earnings record, but you get the picture; the longer you wait, the more you’ll receive each month.
So the longer you put off starting Social Security, the higher the amount you receive per month. The amount you’d receive goes up each year you wait, until age 70.
What’s the catch? Well to delay Social Security… you have to… delay. You have to be able to go without the income now in order to get a higher income later.
Some people get to this point and automatically take the bird in the hand versus the two in the bush. And indeed, some people do not have enough money saved for retirement that they simply can not ‘afford’ to wait.
But if you have saved money for retirement – there is a very good chance you can benefit from delaying the start of your Social Security income.
It might make sense to take income from some of your personal retirement savings (ex: TSP, IRA, etc.) while you delay starting Social Security.
The rule of thumb is that the longer you delay starting Social Security – the higher your benefit will be. But it is not a hard and fast rule that you should delay as long as possible.
Because each person’s financial situation is unique, it’s important to find that ‘sweet spot’ for your situation.
Let’s Look at an Example:
We look at an example of how changing when you turn on Social Security can affect the chances of a successful retirement.
Again a reminder that everyone’s situation is unique, and this is a simplified example to highlight a concept.
In our example, we looked a couple where the husband and wife are both the same age and a few years from retirement.
Here are the 4 scenarios I ran:
Scenario 1) Turning on Social Security at Age 62
In this scenario, we said that the couple both turned on their Social Security at age 62. The probability of successful retirement was 75%.
Scenario 2) Turning on Social Security at Age 66
Now, we looked at what would happen if they delayed starting Social Security until 66 (their Full Social Security Age in the example). In the mean time income from their personal savings filled the ‘gap’ of Social Security.
In this scenario, their probability of successful retirement went up to 88%.
Again, we weren’t changing any other variables. They are still living on the same amount of money – we’re just changing when they start their Social Security.
Scenario 3) Turning on Social Security at Age 70
Now we looked at what would happen if they delayed starting Social Security until they both reached age 70. So while they’re delaying Social Security, they’re using personal savings to make up the difference.
And in this scenario, their chances of successful retirement actually went down slightly. Here they have a probability of successful retirement of 85%.
What does this tell us?
That for their personal situation – it might not make sense to delay until age 70.
For an actual client – we would, of course, run more scenarios and look at many other aspects.
But we can look at this simplified example and see that it might not always make sense to delay Social Security as long as possible.
Scenario 4) File & Suspend
The last scenario we look at involves the File & Suspend strategy. File & Suspend doesn’t work for everyone, but when you have spouses who are close in age it can be a way to increase the amount of Social Security you receive.
When we looked at our example couple using File & Suspend, their probability of successful retirement went up to 91%.
Increasing Probability of Success by Changing Start of Social Security
So what’s the take-away? That you might be able to increase your chances of successful retirement by understanding your Social Security benefit.
Deciding the best time to start Social Security for your personal situation involves many factors – and if you use Monte Carlo simulations – they should only be one (of many) tools you use to evaluate your options.