The Present Value Dilemma

Deciding to take a lump sum instead of ongoing pension payments is challenging. One option gives you a nice big check with all the associated possibilities and the other option promises years of much smaller monthly checks. Which should you choose? Is there one right answer?

Unfortunately, there’s no one-size-fits-all answer to this question. I have my professional biases and I’ll get to those in a moment. But as with most things financial it’s a facts-and-circumstances sort of issue and your “right” answer can absolutely be different from your coworker who was offered roughly similar terms.

During my time as a financial planner I’ve encountered this question hundreds of times. While the circumstances are often different, there are commonalities that help create a rough framework for how to think about these questions for yourself.

Along these lines I’m including portions of a recent WSJ article on this topic. The author gives her perspective after being offered an early pension buyout by her employer. Her approach is probably the most straightforward I’ve read, so that’s why I’m sharing it with you.

But first I’ll add some of my own thoughts.

Much of the decision process associated with this is emotional and that’s okay. Someone is offering you what seems like more today all at once when the alternative is waiting to receive what seems like less over time. Apparently this is why nearly half of people who are offered pension buyouts decide to take them.

The main problem with this is a lack of appreciation for how time value of money and the present value concept works. In finance, present value implies that money received today is worth more than the same amount received in the future. That seems straightforward so maybe that’s where many people stop. However, money received within a pension framework isn’t the same now or later because it gets adjusted for an assumed rate of return, inflation, or perhaps the yield on a government bond benchmark. This adjustment is meant to equalize the difference between now versus later.

The pension program guarantees your income based on how long they think you and other pensioners will live and how much they expect to make on plan assets along the way. It’s easier for them to simply cut you a check because then they’ll no longer be responsible for providing your income. They back out their assumed rate of return, which is higher these days as government bond yields have risen and mail you your check assuming that you’ll take the ball and run with it. Doing so takes a bite from plan assets but saves money in the long-term as the future value of those would-be payments is higher than the present value check you just cashed, assuming the pension managers invest prudently over time. Who benefits from these potentially higher future values? The retirees who opted to keep their pension.

Assuming you take the lump sum buyout, you’ll want to at least replicate the pension program’s assumed rate of return to come out even over time. If not, you've lost money. If you put your lump sum into an IRA, such as the WSJ reporter says she’ll do with hers, you’ll be taking all the responsibility of being able to pay yourself at least as much as the pension program would have. I don’t have any numbers to back this up, but I’ll wager that most people who take the lump sum and manage things on their own don’t accomplish this.

Because of this over the years I’ve recommended that clients choose the lump sum option less than 10% of the time. I know that most people prefer the sense of security that comes from receiving regular income. I also like them to worry a little less about how their investments are doing. And pension plans usually have lots of participants and assets, so risk is spread around versus the retiree going it alone in their IRA. (Obviously I can and do help manage these dollars for clients, but you see my point…)

So, if it’s “extra” money maybe go ahead and put it in your IRA, invest aggressively and grow it for somebody else, such as your kids or other beneficiaries. If that investment risk scares you or if you’re planning, perhaps ironically, to use the money for long-term income, you’re probably better off leaving the risk on the pension plan’s shoulders.

That said, there are a variety of reasons why taking the lump sum might be an option. Maybe you have other savings and investments to rely on. Maybe you have additional income beyond Social Security, such as rental income, royalties, or all that cash coming in from your encore career as an Instagram influencer. Maybe you have reason to be very concerned about the health of the pension program and it’s not insured by the PBGC ( Or maybe you favor independence (as I do) and have other plans for the money, bearing in mind that it’s likely all taxable as you withdraw it.

From the Wall Street Journal (a link is below if you’d like to read the entire article)…

A few weeks ago, my former employer offered me a check for nearly $44,000. If I take it, I’ll have to give up a monthly pension of $423, scheduled to start at age 65.

Should I grab the $44,000—or keep the pension?

Deciding whether to take the money or keep the pension requires doing some math and weighing competing risks. Taking an upfront payment—as more than 40% of workers typically do—raises the odds you’ll run out of money in old age. But many workers have pension incomes that lack cost-of-living increases, leaving them vulnerable to inflation…

…Despite significant reservations, I’m taking the upfront money this time. That doesn’t mean you should do the same. Here’s what to consider:

Crunch the numbers

The math frequently favors keeping the pension, said Joshua Gotbaum, former director of the U.S. Pension Benefit Guaranty Corp., or PBGC, which insures benefits when companies terminate pension plans and lack the assets to cover promised payments.

To replicate my pension, I asked New York Life how much it would cost me to buy a deferred annuity that will pay me $423 a month, starting at 65. The answer: $55,531, which means my payout falls $11,531 short of what I’d need.

I could instead invest the money.

Assuming I were to earn the S&P 500’s long-term average annual return of 7.4%, my $44,000 would appreciate to $72,500 by the time I turn 65. Using the 4% withdrawal rate that long has been considered a relatively safe level of retirement spending yields an initial monthly withdrawal of $242. With 3% annual inflation adjustments, that wouldn’t grow to $423 until I am about 84. 

Reasons to keep the pension

Longevity is the main reason I kept my pension in 2015. The longer I expect to live, the more valuable my pension’s promise of a lifelong income.

Steve Vernon, a former pension actuary, advises people to keep a pension if they lack enough guaranteed income from other sources, including Social Security, to cover such basic expenses as food and housing.

A pension also makes sense for those who aren’t comfortable managing their money or might have difficulty doing so in their later years, Vernon added.

My pension is small enough that in the unlikely event my former employer falls on hard times and turns its pension over to the PBGC, my payment should be fully covered. (The PBGC currently insures up to $6,750 a month for a 65-year-old.)

Why I took it

I’m going to take the $44,000 and roll it into an IRA, where it can grow tax-deferred until I start taking required annual distributions at 75.

Why the change of heart?

As retirement approaches, I have a better understanding of our future finances, including other guaranteed sources of income.

Inflation also spooked me. My $423 monthly check seemed substantial enough back in 2015. But thanks to rising prices, I’d need $544 to have the same buying power today. Because my pension is frozen at $423 a month, it is going to buy even less when I’m 65, never mind 85. Having a guaranteed income stream that covers an ever-shrinking share of my future budget doesn’t seem that helpful. 

I hate to admit it, but my decision is also an emotional one. When I consider what my 2015 lump-sum would have grown to had I invested it in the stock market, it is hard not to feel regret. Since Jan. 1, 2016, the S&P 500 has earned a 12.25% annualized return.

To find out how much I’d need to earn on the money to match the promised pension income, I called Brian Tegtmeyer, an adviser in Dublin, Ohio. 

He said if I live to 85, I’d need to earn an average of 5.9% a year on my $44,000 to equal the cumulative income from my pension, assuming I invest my monthly checks and earn the same 5.9% return. If I reach 90, my lump-sum would have to earn 6.6% a year to equal the pension. At 95, the break-even return would be nearly 7%.

Because I’d have to take a lot of investing risk to keep up with the pension, Tegtmeyer recommends sticking with the pension.

But I have a high risk tolerance and I figure 6% to 7% isn’t an unrealistic average annual return to expect over several decades. So I’m going to invest the money and hope something remains for my sons, who aren’t eligible to inherit my $423 pension.

Here’s the link I mentioned… WSJ has a paywall so let me know if you hit it and I can send this to you from my own account.

Have questions? Ask us. We can help.

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Just a Few Quick Items...

Good morning. Last week I said I’d be buying back some time by taking a couple of weeks off from posting these blogs. I’m sort of still doing that but wanted to share a few things with you anyway.

First, the Schwab “integration” is off to a good start. I can see everything, can do transactions and so forth, and you should have access available too if you’re interested in logging in directly to the Schwab site (assuming, of course, that I’m managing your investments and/or your accounts were at TD). Let me know of any questions.

Second and unrelated, I’m posting some snippets below from my research partners at Bespoke Investment Group about mortgage rates and the real estate market. This gets to the suggestion that the Fed has “killed” the housing market with higher interest rates. They haven’t killed it because there are lots of reasons why people move, but the squeeze is on.

Third and completely unrelated, I’m taking a moment to comment on the death of Jimmy Buffett last week. I found his “Gulf and Western” style later in life and memorized every word and note on Songs You Know by Heart. I didn’t grow up on it, but my kids did and suffered through me murdering the songs on accoustic guitar. And I wore out my digital copies of his 2020 albums, Songs You Don’t Know by Heart and Life on the Flip Side. Say what you will about his “island escapism” style or his… whatever, but I think those last two albums were just about perfect. Anyway, here’s a Tuesday morning toast to JB. He's most certainly resting in peace.

Snippets from Bespoke…

- The national average of a 30-year fixed rate mortgage is at the highest level in over 20 years.

- Rates for new mortgages are especially elevated relative to rates on already outstanding mortgages, and that creates no incentive for existing homeowners to enter the housing market or put their home up for sale.

[Last week] the Bureau of Economic Analysis revised data on the effective mortgage rate on outstanding mortgage debt through the second quarter. Whereas the aforementioned 7.23% mortgage rate is for anyone looking to enter into a new 30-year mortgage today, this effective rate can be thought of as the average rate being paid by existing borrowers.

While current mortgage rates are higher than any point of the past two decades, they are even more elevated relative to the effective rate on outstanding mortgages. As shown below, the spread between the current national average and this effective rate on outstanding mortgage debt is slightly off the highs from late last year, however, that spread remains at some of the widest levels since the late 1970s/early 1980s. Admittedly, the two rates are not perfect comparisons given that outstanding debt likely looks very different (with regards to borrower profiles, terms, etc.) from that of a new 30-year fixed rate mortgage, but the general point is the same: for the bulk of those who already have a mortgage, a new mortgage at current rates would incur significantly higher costs. That gives them little reason to enter the housing market, and thus, is part of the reason for the dearth in housing inventories.

[Comparing new mortgage payments to existing mortgages…] the spread is even more blown out and has far surpassed readings from the late 1970s/early 1980s, and the incentive for an existing home/mortgage owner to move looks even worse. Based on the current median price of an existing home and the current average 30 year fixed mortgage rate, the typical payment comes up to a little over $2,000 per month. Substituting that current 30 year rate with the effective rate on outstanding mortgage debt, the payment would be much lower at just $1,421 per month!

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How About Your I Bonds?

A few of you have recently asked what to do with your I Bonds, should you hold or redeem them. This is a good question amid the swirling interest rate environment, so let’s take a few minutes to look at some of the details.

As you may recall, we talked about buying I Bonds when inflation was peaking a year or so ago. I also bought some back then partly as an experiment because my preference is for investments that have an active secondary market that helps them to be easy and cheap to buy and sell. You buy I Bonds directly from the US Treasury on its website and, while not a horrible experience at any stretch, the process is a little clunky. Anyway, like many others back then I bought some I Bonds and, like you, are now considering my options.

I Bonds pay interest based on the Consumer Price Index and that inflation measure has come down meaningfully in recent months. At their peak during the summer of 2022, I Bonds were paying 9.62%. Yields on US Treasury bonds were in the mid-3% range at the time, for comparison. But since part of the rate calculation on I Bonds can reset every six months based on CPI readings, they marched down to 6.48% and then to where they currently sit at 4.3% for new purchases, including a recently increased 0.9% fixed rate. That’s a far cry from almost 10% a year ago, right?

The following chart from Treasury Direct shows this rate progression over time. I’m not reposting the image here because the text would be too small. Click the link if you’re interested.

And here’s some higher-level information on I Bonds for reference.

When I log into Treasury Direct I see that my original bond now pays 6.48% and another bond I purchased in January of this year is down to 3.79%.

These rates are lower but still decent, right? Let’s compare what else is available in the marketplace.

Below is a yield matrix from yesterday morning showing timeframes across the top and issuer type down the left side. To simplify, just look at the top and bottom lines and the left column showing rates on bank CDs and US Treasury securities out to one year. I consider both to be risk-free and each pay about 5.4%. These investments have a defined maturity date and, assuming you don’t need to sell them prior to maturity, essentially no risk. You’ll see other options below offering higher rates, but these get riskier as rates rise.

You’ll see in the second column from left that you can lock in 5+% returns for maybe a few years. Longer than that and yields drop meaningfully. You’ve heard of the inverted yield curve, right? This is what it looks like in the real world and it’s all backwards.

And a quick check of “high yield” savings accounts on shows that some online banks are offering 4.5% to 5% on money market accounts. Pretty favorable but those rates can change anytime.

Alternatively, we can look at a typical bond fund that goes out a little farther, say in that 5-7yr column above. Vanguard Total Bond Market is an index fund that buys Treasuries, government agency, and high-quality corporate bonds, is free to buy pretty much everywhere, is cheap to hold, and pays a monthly dividend. It’s current yield, as measured in a standardized way known as the SEC Yield, has averaged around 4.6% in the past 30 days.

Okay, so we have options in the 5%-range for money out to a year or so, maybe a little longer with CDs and Treasuries. Money markets are nice but there’s no time guarantee there. Medium-term higher-quality bond funds offer a decent yield but can’t keep up with short-term investments amid an inverted yield curve. Bond funds will catch up eventually, however.

What to make of all this? Depending on what happens with inflation over the next couple of years and exactly when you bought your I Bonds, your investment return is likely to average out to about the same as the bond fund, perhaps a little less. You had a pop in rate for the first year or so, or maybe the first six months, potentially followed by X years of average to below average returns. In other words, I Bond returns where fun while they lasted and helped assuage the impact of high inflation but, assuming inflation continues coming down and stays there for a while, they quickly lose their luster.

So I suggest you monitor your I Bonds to see if the rate continues to drop. Roughly 4% is a decent return for short-term money but we don’t want medium or long-term money to linger too long at rates lower than that.

A couple other considerations…

  • You’ve owned your I Bond for at least a year, ideally at least 15 months. The latter is because redemption prior to five years incurs a three-month interest penalty. It would be great to have at least received a year’s worth of interest. This accrues monthly and isn’t pro-rated, so ensure you’re counting in full months. I plan to hold the bond I bought in January until next Spring and then will likely be looking for the exit.
  • You’re not holding onto the I Bond for some other reason, such as saving for college, where potential tax benefits are part of your calculation. If not for college, interest earned will likely be taxable at the federal level in the year you redeem, so just be aware of your tax situation. Otherwise, income tax on the interest is deferred so long as you hold your I Bond.

Other things to do with the money? Fund an IRA for you and your spouse. Or maybe indirectly add the money to your 401(k) or other plan at work. You can buy stocks if you’re thinking longer-term or consider medium-term bonds since rates have risen. Otherwise, that CD or Treasury going out a year or so looks pretty good right now if you don’t want to tie up your money longer than that.

And a quick business update: My associate, Brayden, has left Ridgeview to pursue other things. I'd like to thank him for being a diligent and patient student these past years, and I wish him well. I'll be looking for his replacement but, in the meantime, am positioned well due to support from my virtual asisstants, Brandy and Melissa.

Have questions? Ask us. We can help.

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Will We or Won't We?

It seems as if a recession has been right around the corner for many months now, if not a year or so. First a recession was inevitable given the run-up in inflation we saw last year. Then it was imminent due to the Fed raising interest rates so much so quickly to fight inflation. And then bank failures earlier this year were supposed to cause banks to stop lending and consumers to stop spending, crashing our economy.

Well, so far an outright recession continues to only loom on the horizon. According to experts, recession chances for the rest of this year have fallen to 33% and 59% by next summer.

Maybe this is what a soft landing looks like. The term originated in this context during the Nixon-era economy and following the 1969 moon landing, according to the Wall Street Journal. A soft landing is the elusive state where a too-hot economy is cooled down by higher interest rates while still avoiding a recession. Historically, the Fed has rarely been able to engineer this outcome because it usually raises rates too quickly and shocks the system. But maybe a soft landing is more possible in the post-Covid world, whatever that means. Fed Chair Jerome Powell has himself recently acknowledged the Fed “is navigating by the stars under cloudy skies”, so uncertainty around all this is high. (And at least he’s honest about what he doesn’t know, which is a good sign.)

Technically, the Business Cycle Dating Committee within the National Bureau of Economic Research is the government office that “calls” recessions and doesn’t do so until well after the fact. However, the various data they tend to watch seem to be trending fine. GDP growth appears stable. Unemployment is very low. Inflation has been reducing the purchasing power of wages, but CPI, the typical inflation measure, has been trending lower for months. NBER looks at other indicators too but tries to pinpoint when the economy has peaked before suffering a meaningful decline in activity lasting at least several months, which bottoms out before improving. Their analysis requires a lot of data that’s only available in hindsight, so we often find out we’ve been in a recession after it’s already over.

How helpful is that? I contend that whether our economy falls into recession or not is largely academic. It’s important to know but not especially relevant for most Americans. The stock and bond markets work well ahead of the economists at NBER and households, all of us, live it day to day anyway. We have to deal with the impact of inflation and higher interests rates in real time, so economists can call it whatever and whenever they like. And parts of the economy can do fine during a recession while others get their teeth kicked in; the impact isn’t felt uniformly. Various surveys of regular Americans show that anxiety about the economy and inflation is already high and disproportionately felt by those at the lower end of the income spectrum. People say they’re planning to spend less but not yet. It’s sort of a variation on the acronym NIMBY… my backyard is fine, but everyone else’s looks horrible. This dynamic has to be part of the reason why the economy is still doing well.

My point isn’t to diminish the work of NBER and other economists, but to suggest that our own household trends often trump those of the broader economy. The takeaway is that regardless of the macro environment we should frequently assess the risks we face at the micro level in our own households should the economy slow.

Here's a handful of categories to consider whenever experts wring their hands about recession risk.

What’s my liquidity position?

If my sector and industry or yours, whether it be construction, retail, and so forth, gets hit especially hard during a recession, do I have enough cash to get by for how long… six months, a year? Is this cash-cash, as I call it, that’s available in a bank or brokerage account, or is it stashed in my 401(k) and accessing it would come with taxes and maybe a penalty? Conduct a mental fire drill to determine how much cash you can get ahold of in what timeframe and with what, if any, sort of penalty. Is it enough for whatever doomsday scenario you have in mind?

What’s my debt situation?

Rates have already gone up, of course, so any adjustable-rate debt is likely resetting and getting more expensive in a process limited only by annual caps. If I had any adjustable-rate debt, I’d evaluate refinancing into something fixed while the economy, and presumably my little corner of it, is still strong. The Fed is in pause mode with rates and that’s expected to continue when they meet again this week, so I could hold out to refi based on a guess about when rates go down. But then I remind myself that rates would likely only be lower if we’re in a recession and my access to credit might have changed.

What’s my work situation?

Being self-employed has it’s benefits but when business conditions suffer I can’t simply rely on someone else to pay me. I also can’t lay myself off to save the business some money. Regardless, gauging the solidity of our prospects is a moving target, at least to some degree, and gets back to considering our liquidity and debt positions mentioned above. Having readily accessible savings coupled with a manageable and sustainable debt load should take the edge off of getting fewer hours at work or even having to look for a new job.

How are my investments situated?

Do I have more than 5-10% of my long-term savings invested in one company? Am I loaded up too much in one sector of the economy that could suffer during a recession, such as Technology or Consumer Discretionary? Are there other parts of my portfolio that are too risky? Try to shore up what appears shaky but be wary of making wholesale changes without good reason. While it’s valuable to review how our investments are situated we should avoid being overly reactionary.

If you have good answers to these sorts of questions you’ll be able to weather most of what the economy throws at you. If not, as is the case with many of us, you’ll have more time to put your house in order if you start now.

Have questions? Ask us. We can help.

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Shifting to Schwab

You’re likely aware that this week is the last for TD Ameritrade. The final push for getting everything, all client information, investments, and a host of other data, into the Schwab system will happen this coming weekend. This change is sure to have created lingering questions, so I’m hoping to address some of them here.

First, and perhaps most importantly, please know that your personal and investment data is secure. I have all the necessary access to work on your behalf until the end of the day on Friday. I’m already established on Schwab’s system so I can hit the ground running come Tuesday morning. (I’ll be monitoring everything over the weekend as well…)

I’m planning on needing extra time over the next couple of weeks so this will be my last post until about mid-September. But know that I’m definitely still working and will be available for any questions.

Viewing your accounts –

You can continue using your portal since that’s coming from a third party, called Orion, that I contract with. Orion gets data from TD and Schwab each night, reconciles it, and presents it on the portal, so that part of all this seems pretty straightforward. Your current login credentials will continue to work, and the site won’t look any different.

If you’ve been logging into TD’s website,, that will switch to As with TD, this is Schwab’s “institutional” website and is different from, their retail site. Your TD credentials are supposed to carry over to the new Schwab site. So far so good but let me know of any issues. It will be important to log into the Schwab system at least once to continue receiving documents electronically.

Other information –

Links to your bank or credit union will also carry over except in a few special circumstances. We will still use DocuSign to refresh existing bank instructions, or to establish new ones, as needed.

Since we’ll be using two separate custodians this year you will receive two sets of tax forms next Spring. These will be available in your portal and on the Schwab site, or I can always get them for you.

You may have seen disclosures from Schwab mentioning a bunch of fees for various services. Most of that doesn’t apply to us and, for those that do, part of my job is making sure your portfolio costs are as low as possible.

There are bound to be wrinkles with such a big transition but, beyond that, from your perspective it should mostly be business as usual. Like I mentioned some weeks ago when talking about custodians, their core functionality is pretty much the same and is becoming more commoditized in the marketplace. Trading is trading and paperwork is paperwork, and so forth.

But an unfortunate postscript… phishing and other fraudulent activity is piggybacking on this transition. What follows is from Schwab outlining how recent schemes have played out and some things to remember. I’m bolding a few lines for added emphasis.

Often, scams targeting advisors and their clients start with an email, text, or encrypted message that falsely claims to be from a financial institution, government, regulatory agency, or a prominent technology company (PayPal, Apple, Microsoft, etc.). From that point, recent schemes have tended to follow this pattern:

  • The message the client receives contains malicious software—when the client clicks a link embedded in the message, this software installs automatically.
  • The next time the client visits a legitimate financial site, the software acts, redirecting to a malicious website designed to look like the legitimate version, or popping up a message that causes the client to redirect to a malicious site.
  • The malicious website may ask a client to enter personal information such as a SSN, Login ID, password, date of birth, etc. Or the popup message may ask the client to call a phone number that appears to be a legitimate Schwab or TDA assistance line. Recent reports have indicated that fraudsters are posing as Schwab Platform Support, Schwab/TD Fraud Team, TD Security, Schwab/TD Tech Support in their attempts to scam clients.
  • Clients may be asked to download software such as TeamViewer, AnyDesk, SOHO or Help123 to allow the fraudster to remotely access their device. Schwab/TDA will never ask clients to do this.
  • Often, fraudsters will tell a story where they need to remotely access the victim’s device to “check the accounts”, ensuring there were no fraudulent transactions, or claiming to “fix” an existing virus or malware infection. Once they have access, of course, they will steal information, or install malicious software. Using this information and access, they will then attempt to place trades or initiate disbursements fraudulently.
  • When dealing with suspicious emails, always check to see if the email address has been altered.
  • Show clients how they can “hover” over links to ensure the URL of the website they’re being asked to access is legitimate--for example, versus
  • Be careful when providing personal information. Never provide your credentials to a third-party. Verify the validity of anyone calling to say they’re from Schwab. If something seems “off”, do not be afraid to disconnect a call and contact Schwab using a known number.
  • Remind your clients that Schwab will never ask them to install software like TeamViewer, AnyDesk, SOHO, or Help123 to remotely access their computers. If someone pretending to be a Schwab representative does this, they should hang up and call your firm or a known Schwab phone number.
  • Avoid visiting unsecure websites. Look at the uniform resource locator (URL) of the website. A secure URL begin with “https” rather than “htttp”. The “s” in “https” stands for secure which indicates that the site is using a Secure Sockets Layer (SSL).
  • Keep your computer virus software updated to scan for the most recent malware—if a scan detects malware, remove it immediately, and then rest your passwords and contact your financial institutions immediately.

Have questions? Ask us. We can help.

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Show Me the Money

By now I’m sure you’ve heard how important it is to try and wait on starting your Social Security benefits. You’re leaving money on the table if you don’t, etc, etc. While the reasons for this make good intuitive sense, lots of people seem to be going in the other direction.

I mention this because of a survey from Schroders, a global investment firm. Survey respondents report planning to start their benefits before their full retirement age, even as they report recognizing how this will cost them money in the long-term.

The survey was covered in USA Today recently, but I’ll share sections of the article here so we can discuss some of the issues. My notes are italicized for clarity and a link to the full story is below…

Only 10% of nonretired Americans say they will wait until 70 to receive their maximum Social Security benefit payments, according to the 2023 Schroders U.S. Retirement Survey of 2,000 U.S. investors nationwide ages 27-79 between Feb. 13 to March 3.

Overall, 40% of nonretired respondents plan to take their Social Security benefits between ages 62-65, leaving them short of qualifying for their full retirement benefits. 

How much is full Social Security now?

Social Security Income (SSI) benefits are based, in part, on a Full Retirement Age (FRA) that depends on your birth year. For example, those born in 1954 or earlier have an FRA of 66 and this tapers up by month to those born in 1960 or later who have an FRA of 67. Your FRA is like a line in the sand, or perhaps a pivot point. You can start taking your benefits at 62, but it gets reduced a bit for each month that you take it early, at about an 8% annual rate. Conversely, your benefit base grows by the same amount every month you wait beyond your FRA and keeps growing until age 70, assuming you can hold off for that long.

For example, if you retire in 2023 at full retirement age, your maximum benefit would be $3,627… However, if you retire at age 62, your maximum benefit would be $2,572. At age 70, your maximum benefit would be $4,555. 

That you get more for waiting seems straightforward, but the real impact shows up in cumulative household cash flow over time. If we assume longevity will be on our side the total additional money after waiting until 70 to start SSI would be sizeable. For example, a random sample from the variety of financial plans I’ve done over the past 10+ years shows about $100,000 of extra income over a longer life expectancy by waiting until age 70. Contrast this with starting SSI early, and household income is reduced by roughly $174,000, on average, over a retirement period. The breakeven age is often in the late-70’s, so you’re coming out ahead automatically if you think you’ll be receiving payments for at least that long.

“The choice to forgo larger Social Security payments is a deliberate one, as 72% of non-retired investors – and 95% of non-retired ages 60-65 – are aware that waiting longer earns higher payments,” Schroders said in a statement. 

Why are Americans choosing to take Social Security earlier? 

Mostly fear.  

Forty-four percent said they were concerned that Social Security may run out of money and stop making payments, and 36% expect they’ll need the money, the survey said. 

Social Security is expected to be depleted in 2033, a year earlier than prior forecasts, the Congressional Budget Office said in June. 

“We have a crisis of confidence in the Social Security system and it’s costing American workers real money,” said a rep from Schroders.

Fear can be helpful when it makes us skeptical and forces us to ask questions. But fear gets irrational pretty quick and can lead us to make poor choices. That said, it’s understandable that many, if not most, Americans are afraid that their SSI won’t be there when they need it. The issue is discussed frequently in the press and asking Google will only lead you down the rabbit hole.

The latest news is that SSI benefits will have to be cut by 23% starting in 2033 because that’s when the program is projected to become insolvent. If so, this would mean a reduction in cash flow for a typical household of about $14,000 per year, according to the Committee for a Responsible Federal Budget. That sounds huge, and it is, but how likely is that to actually happen?

Frankly, I don’t know which is more cynical, that our elected officials are so inept (or collectively uncaring) as to let this happen to Social Security, or that they’ll probably wait until the last possible moment to kick the can down the road again. Either way, “fixing Social Security” has long been known as the third rail of American politics for good reason: nobody wants to touch it.

Personally, I’m in the “kick the can down the road” camp. My reasoning has to do with how our elected officials know how to fix the problem because the recipe is reported to them annually by the folks who run the program. Taxes will need to be raised on higher earners, the FRA will need to go up to 70 or 72 for younger workers, and yes, benefits could be trimmed but other tweaks could be made prior to that. Take any one or all three and you can see why “delay and catch-up” seems like the most workable solution from a political perspective. Nobody wants to stick their neck out far enough before there’s a real crisis to solve.

Okay, so where does that leave us? I think a pragmatic approach is best. What I mean is that instead of potentially hamstringing yourself by starting benefits too soon, try to wait as long as possible. You can start your benefits in any month once you’re 62, so just hold off as long as you can. Ideally you’d at least wait until your FRA to get your “full” benefit, but every month you wait means a high benefit base than it would otherwise be, and that lasts the rest of your life.

But how are you supposed to get by without your SSI? Spend from cash savings. Spend from your bond investments, maybe your stock investments too. That’s what you’ve been saving for, right? Work with me (or another fee-only planner) to strategize about how best to do this. You might have more room to wait than you realize.

Have questions? Ask us. We can help.

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