Lifetime Income Stability is a significant part of the equation as we focus on Planning for your preferred future.
Social Security can play a foundational role on that bottom level of your cash flow pyramid, by providing a solid base of guaranteed, increasing, lifetime income.
Across the top of this chart are the various ages, from 62 to 70, at which you can choose to begin taking your Social Security benefit.
The second row shows your hypothetical monthly SS benefit at each of those ages. As you can see, your benefit increases by between 7% and 8%, plus the assumed 2.5% inflation, for each year you delay starting your benefit.
If you choose to start your social security income benefit at age 62, you’d receive $1,675 per month, or $20,100 per year. However, if you waited until age 63, you’d receive $1,777 per month, or $21,324 per year – and so on all the way through age 70.
The third row tells you how much money you would need to have in an investment account, assuming you felt it was safe to withdraw 4% of that account value every year, over the course of your entire lifetime, in order to provide an amount of income equal to that of your social security check.
So for example, at age 62, in order to receive $1,675 a month or $20,100 a year from your investment account at a 4% rate of withdrawal, you’d have to have $502,500 in your investment account.
But if you waited one year and started taking your SS benefit at age 63, you’d need $533,110 in that same investment account in order for your 4% withdrawal to equal your higher monthly social security benefit of $1,777 per month, or $21,324 per year.
That’s an additional $30,600 you’d need in an investment account, as shown in row 4.
So let’s imagine you are trying to decide between starting your Social Security benefit at age 62 or waiting until age 66. We know that your SS benefit will either be $1,675/mo. at age 62, or $2,416/mo. at age 66. That’s a difference of $741/mo., or $8,892/yr.
And in order to get that much extra income from your investment portfolio, assuming a withdrawal rate of 4%, you’d have to save an additional $222,300 over that four year time period. That’s a lot of extra savings. This is probably not going to happen. So from a cash flow perspective, it would be pretty hard for your investment portfolio to compete with the additional income you’d get for deferring Social Security.
But what if you could go ahead and start your Social Security at age 62 and just save those payments in an investment account for four years instead of spending them? Would that additional savings be enough to make up the difference in your investment account?
Remember, if you start SS at age 62, you’ll get $1,675/mo. If we increase those payments by 2.5% annually for inflation and add them all up for four years, you end up with a total savings of $83,466.
That’s clearly not the $222,300 we said we needed, but that money should also be growing over that four-year period of time. So what kind of a return would we need to earn on that money over that four year period to get it to grow from $83,466 to $222,300? I’ll spare you the calculation and just tell you. It would have to grow at a rate of 27.75% for each and every one of those four years!
Obviously, that’s not likely to happen.
So, as you can see, from a purely cash flow perspective, deferring your Social Security start date can really boost the amount of lifetime, guaranteed, increasing income at the bottom level of your Cash Flow Pyramid – which in turn increases your income stability ratio.