If you’re planning to begin taking social security payments as soon as you are eligible, you could be missing out on additional long-term income. One factor many people fail to weigh when deciding when to receive retirement benefits is whether they have alternative assets that could let their government-guaranteed nest egg grow larger. Waiting to receive social security benefits is sometimes the smarter approach to making your retirement income last.
Social Security is a unique thing. It is adjusted for inflation, it lasts the span of one’s life and it grows at a regular rate until you start receiving benefits. Social security is a valuable, reliable income stream, but there are factors that impact just how large this income stream can be. Americans can begin receiving social security payments at 62, though it comes with a payment reduction of up to 30%. Full retirement age, according to the Social Security Administration, is around 67 years old (depending on your birth year), and at 70 years, the monthly benefits stop increasing. The question is when to begin payments.
There are many considerations that go into this decision, such as health concerns. However, one consideration I’ve rarely heard people mention—but which should be a primary determinant—is the valuation of what one is selling from their portfolio. All decision making should be based on the opportunity cost of the first alternative, in this case, social security. When it comes to retirement income streams, the second alternative is often an investment account.
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Stock and bond valuations (e.g., how expensive they are) are currently high. By many measures, the U.S. stock market is approaching the most expensive it has ever been. Similarly, bonds are trading at very low interest rates, hence very high prices. Selling stocks at historically high prices can net you four to five times what selling stocks at low prices would yield. In this market environment, why not sell parts of your portfolio and let your social security benefit grow at 8% a year?
Consider a hypothetical example using rough figures. Bob has reached his full retirement age of 66 and needs $60,000 a year to fund his lifestyle. His social security benefit is $30,000 a year if he takes it today, or he can let it grow to almost $40,000 by the time he’s 70. Bob also has a $500,000 portfolio, investing 80% in stocks, so he is able to sell stocks now and get top dollar for them. Initially, Bob lives on proceeds from portfolio sales and defers taking social security. Sometime between now and when Bob turns 70, we fall into a bad recession. Stock prices drop 50%, meaning Bob has to sell twice as much stock to fund the same amount of lifestyle. At this point, Bob decides he’s not getting the best price for his stocks anymore, so he turns on his social security, enjoying a $40,000 benefit, which means he only needs to sell $20,000 of his portfolio (presumable the safer assets) to fully fund his lifestyle.
There are two big benefits to this approach:
- Bob sold $240,000 worth of stock ($60,000 x 4 years) while prices were high and the getting was good. Depending on how bad the recession is, this could easily save Bob more than $100,000.
- Once a recession occurs (which can last a long time), Bob can fund more of his lifestyle through his guaranteed social security payments and put less pressure on his portfolio while prices are low.
Relying on portfolio yield and deferring payments is something that is rarely (if ever) discussed. If you can live on your financial assets while valuations are high, let your social security continue growing at 8%, guaranteed. It has major implications for how you fund your retirement years and can provide even more financial security in the future.
This information is for general use with the public and is designed for informational or educational purposes only. It is not intended as investment advice and is not a recommendation for retirement savings. Lincoln Financial Advisors Corp. and its representatives do not provide legal or tax advice. You may want to consult a legal or tax advisor regarding any legal or tax information as it relates to your personal circumstances.
Loic LeMener, CFA®, MBA, CFP® is a registered representative of Lincoln Financial Advisors Corp.
Securities and investment advisory services offered through Lincoln Financial Advisors Corp., a broker-dealer (member SIPC) and registered investment advisor. Insurance offered through Lincoln affiliates and other fine companies CRN-1805991-052517.Opus Wealth Management is not an affiliate of Lincoln Financial Advisors Corp.
About the Author
Loic LeMener is the founder and President of Opus Wealth Management in Dallas, Texas, a boutique wealth management firm that specializes in personalized client solutions. Loic and his team provide their clients with a targeted needs evaluation to answer important questions that provide a better, more personalized experience. The team focuses on integrity and believes in the following “golden rule” – they won’t do anything for you that they would not do for themselves or their loved ones.
Loic received his Masters in Business Administration from Southern Methodist University, studying Finance, Accounting and Portfolio Management. He also earned the Certified Financial Planner™ certification and the prestigious Chartered Financial Analyst® designation. In addition, he has been quoted in national publications such as Barron’s.
In his free time, Loic is a devout reader, with his favorite topic being “value investing.” His favorite investors are Warren Buffett, Ben Graham, Charlie Munger, Seth Klarman, Howard Marks, and Jeremy Grantham.