Since I can remember, I've been readingthat Social Security is goingbankrupt. But time has passed, and,what do you know? Social Security isstill here and the sword of Damocles isstill dangling. It probably will for theforeseeable future, as long as the averagelifespan continues to increase.However, Congress knows a political,electrified third rail when they see one,so they'll tinker with eligibility dates,taxability, and means tests, but SocialSecurity is here to stay.
Social Security acts as an annuity (ie,a payment that lasts for life), is guaranteedpartially tax-free, even for thewealthiest, and is adjusted for inflation.You continue to get a check no matterhow long you live or how much youmess up your portfolio. If you thinkabout it, this fact alone is a strong argumentagainst the privatization of SocialSecurity suggested to possibly increasereturns. It's a security net against ourown foolishness and just plain bad luck.
Think of Social Security as a bond, anIOU from the government, that we allhold. It's the granddaddy that definesentitlement. Its value varies with interestrates, which, currently being low,would put its value as high as $500,000.You read that right, and its size mighteven suggest that your portfolio isunconsciously weighted too muchtoward "bond exposure" when you figureSocial Security in.
The inevitable answer:
The question that comes to everyone'smind when we have reassuredourselves of Social Security's continuedexistence is, "When do I start to drawmy payments?" Should you start early,at age 62, when the amount is reducedto 75% for life, or later when theamount scales up to a maximum at age70? It depends.
If you're in bad health, draw early. Ifyour family is laced with centenarians,draw late. Also, do you need the moneynow? Will a surviving spouse need moreor less to get by on their reduced paymentof 50%? Are you planning to workpast age 62? If you do, your benefits willbe reduced. If you work past age 70, thepenalties disappear. It's convoluted, butthat's how it stands—today, anyway.
A lot of ink has been used in calculatingthe "crossover point" where youbreak even drawing less early vs drawingmore later. Social Security itself says thatthe ages 62 vs 65 breakeven age is 73;the breakeven for ages 62 vs 70 is age 77;and the breakeven for ages 65 vs 70 isage 79. It's intended to be equivalent,but that's an 11- to 15-year spread, folks.
But what do most people actuallydo? About 46% draw at age 62, 29%wait to draw full benefits, and 25% aresomewhere in between. And what dothe pundits recommend? Bearing inmind financial status and health as variables,to cut to the chase, most say,"Take the money and run." Even if youdon't need it and invest it for later,there seems to be a tremendous satisfactionin receiving those checks—abird in hand and all that.
There you have it: an oversimplified,subjective take on Social Security thatcan save you a lot of legwork and tellyou what you wanted to hear. SocialSecurity will survive, but you should getit while the getting's good. Isn'tAmerica wonderful?
Jeff Brown, MD, CPE, a partner
on the Stanford University
Graduate School of Business
Alumni Consulting Team, is a
practicing primary care physician.
He welcomes questions and
comments at email@example.com.