Building In A Margin Of Safety

Barron's posted a first hand account from a semi-retired writer, not Neal Templin, about why he chose to wait until 70 to take his Social Security at the start of the year. As is often the case, the comments are worth reading and like they usually do, they lean to taking it early for various reasons. 

Hopefully I've never said everyone should in terms of when to take it but for quite a few years I've tried to really hit on making sure you understand how things work and warning that there are a lot of mistakes to be made. I recently found out that one buddy didn't know his wife could get a spousal benefit instead of her own which has been very costly for them. Big mistake. 

I'm about 25 months from being eligible to take it early. At this point, things would need to take an unimaginable turn for me to want to take it that soon. Unexpected things happen in life of course but I have no desire to stop working so taking it before 67 where the benefit would be reduced, doesn't make a lot of sense to me. My preference has been to wait until 70 to max out the survivor benefit for my wife in case I die early. If somehow I ended up taking it a few months early for some reason, I wouldn't consider that a real change in my plan versus taking at 65 or 66. 

Comments often turn to taking it at 62 and investing it. We looked at that recently with the conclusion that it wouldn't work for too many people. If you take it and keep working, most of it will be withheld because of the earnings test. If you take it at 62 but are pulling money out of other accounts to live off of, then it's sort of like rearranging the deck chairs. If you make a lot in passive income it could work, that is not subject to the earnings test. 

See the scenario below;

Someone who just turned 62, making $100,000 and wanting to retire now and take Social Security right away. A single person goes from making $8333/mo to $1764. Or if his wife makes the same $100,000 and will keep working, they go from $16,666/mo to $10,097.

This scenario could easily have enough in retirement accounts to fill the gap but if they're sort of close to the line with not much margin for error, locking in $1764 (plus COLAs) could be difficult. Sticking with the single earner getting $1764 and the spousal benefit of $882, they've gone from $8333/mo to $2646/mo. Say they are living on 70% of their $8333, that's $5833 so they need their portfolio to kick off $3187/mo. Working backwards, assuming a 4% withdrawal rate, they need $956,000.

Copilot figures that of people 50 and older, making $100,000 or more, only 10-15% have at least $1 million saved. It's not that success is impossible or implausible but this scenario of seems kind of realistic, it's not desperate but something might have to give. Maybe not retiring. Maybe cutting back on spending somehow. Maybe getting some sort of side-hustle type of part time income but remember that too much income might cut into the Social Security benefit. 

If this person delays Social Security until 2028, their benefit would be $2084/mo and in 2030 it would be $2503/mo. If the nest egg, can compound at a not so heroic 6%, it could go from $956,000 now to $1,074,000, in 2028 or $1,206,000 in 2030. 

In 2028 they'd have $2084 in Social Security income plus the spousal benefit of $1042, $3126 plus 4% from the $1,074,000 portfolio for a total of $6706/mo versus their need of $5833. So the margin for error has gone from nothing at 62 to about $900 at 64. In 2030 at 66, their SS totals $3754 and 4% from their portfolio would be $4020/mo adds up to $7774/mo, leaving them about $1900 ahead. 

Arguably, the sweet spot for this scenario is closer to 64 than 62. Remember, one premise at work here is that the percentage of people making $100,000 that have $1 million in retirement assets is low. 

Obviously, some sort of income stream like from real estate or a monetized hobby could create a margin of safety that I think is important to have if at all possible. The question isn't 62 or 70, the question is personal, perceived need for a margin of safety.

I'll put out a second note after the Sunday night session starts if we see anything noteworthy. S&P futures down 10 basis points probably isn't worth anyone's time but we'll see what things look like. 

The information, analysis and opinions expressed herein reflect our judgment and opinions as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation.