Of course, many people would say, that does not surprise us. But this error concerns Social Security payments.
Compounded or Not Compounded
An author in the LA Times, Ms. Weston, had made a statement that the Social Security payment goes up 8% a year for the years between 66 and 70. She said that was a 32% increase. I was thinking that it would be compounded, and the increase would be 36%. Some person wrote to her and made that statement. She said she was right and they were wrong, as the increases are not compounded. She told her readers to google this question, and the statement comes up very quickly that it is not compounded.
But I am not wrong on one other point. Many financial advisers recite that everyone should wait until the highest payment arrives at age 70. This is not a one answer fits all. That is not proper thinking.
Everybody has different situations, circumstance, and dreams. Each person should be considered individually. There are a few major decisions that have to be made.
- How long do you expect to live? You cannot make a decision about Social Security until you make some type of decision on how long you expect to live.
- What are your current financials and what will they be in the near future, and the distant future.
- What type of support system is there?
- What are your thoughts on amount of risk on your funds and how daring are you?
- You will get your full retirement payment around 66 years of age for people coming up on that now. If you take your payments at age 62, you get 75% of the payment for the rest of your life. This is not a take now and change your mind later either. Those increases you hear are only if you have not declared.
- Your payment is based on your 35 highest income earning years. If your years were always at the maximum, your payment now would be around $2,861 if you were declaring at 66.
- Therefore, if you declared at 66, you would receive around $137,328 ($2,861 times 48 months) for the four years till age 70. Therefore, you should assume some return on that money when you are comparing apples to pears.
- Simple math: The difference in the payment would be: $2,861 x 32% equals a difference each month of around $916. Divide $916 the higher monthly payment into the $137,328 that you have built up in the four years and you see the simple break even is 150 payments or 12.5 years. Therefore, at age 82.5 you would be ahead.
- There is one other thing that most advisers do not discuss. You have $137,328. You invest that at a safe 5% for a return yearly not compounded; the return is $6,866 for a monthly return of $572. Subtract $572 from $916 and you get a deficit of $374 a month. Divide that into your $137,328 and you get a break even at 37 years of life before it is all gone. You would be 107 years old.
- If everything went to hell, you would have a nice nest egg of the $137,328 growing every day. That would take care of a couple of gray clouds and who wants to live to 107 anyway.