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Treat Social Security as Insurance?

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Last year I wrote an article, Take Social Security Early or Late? which came to the conclusion that you should take Social Security as early as possible and invest it until you need it.

The theory is that you'll do as well as if you waited, but if you happen to die early, that's money that goes to your estate rather than forfeited.

This is a good time to caution readers that, at the age of 39, I haven't put a lot of research into the area of Social Security. Every time I try to wrap my head around it, there are about 3.4 million minor details that change the equation completely. With everyone's specific situation different, one-size-fits-all advice is difficult.

Back to the theory that you should take Social Security early. Soon after posting the article a pointed me to this great article where a speaker had this great line:

"They're [the federal government is] hoping you're gonna wait. And they're hoping you're gonna die.

So why rehash all this now? Philip Moeller has an article in the May 2015 issue of Money Magazine suggesting that people wait to take their Social Security benefits. I wish I could find it online, but sometimes it takes awhile for Money to make them available.

The interesting thing is that he covers the idea of taking your Social Security right away and investing it:

"Roughly calculated, the typical breakeven age is about 80.5. Until then, you'll get more money by taking benefits early. If you don't spend those benefits but invest them instead, the breakeven age can be even higher."

Of course it is going to be much higher if you've been investing the money for an extra 8 years between age 62 and 70. Maybe someone here can do the math, but I'd venture that 80.5 age goes up to more than 85, perhaps even 90. Theoretically, if you invested the money until age 70 and didn't use it, it would be the same as if you just waited until age 70 anyway. Or at least by my math which was in the aforementioned article it comes out to the same.

Moeller makes the argument that breakeven analysis "feels wrong to him." The reason is that it treats Social Security as an investment where you want to earn the highest return. Instead he argues that it is an insurance policy that protects you from outliving your money.

He says:

"If your home never burns down, is the money you spent on insurance premiums a loss? No. You pay for protection, not profits. That's true for Social Security also."

I say, to-MAY-to, to-MAH-to.

Whether you take it early or late, Social Security is going to act as insurance. That doesn't go away. You aren't going to live to 120 and have nothing. It's just a question of how much insurance you'll be getting each month. If you take the insurance money early and invest it (i.e. you don't have a need for the insurance because your house didn't burn down) you'll be just as well off as if you waited with that cushion of 8 years of payments and investment growth.

I personally view Social Security as a part of the income streams that I'm developing. Those include this business, my wife's military pension, income from our income properties, and tapping into our 401ks/Roth IRAs. We've taken steps to reduce our cost of living in retirement by opting for a 15-year mortgage and getting solar power installed.

A whole lot can go wrong in 30 years, but I'm not currently of the view that when to take Social Security is going to be an insurance policy that we'll lean on.

For us, it still seems like breakeven analysis is the way to go. However, I wouldn't fault anyone for thinking about protecting themselves against a scenario where they ensure they have a good income for decades if they need it. Perhaps it is even helpful to not have the temptation of getting it early and spending it.

Posted on April 27, 2015.

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One Response to “Treat Social Security as Insurance?”

  1. Mark says:

    I have heard the “take it now and invest” arguments made by many others. However, I am also aware of studies that show that the vast majority of those who take SS early do not invest or save the money, they spend it. Even those who do not need the extra income treat SS payments as “found money.” So, the strategy is fine but the implementation is lacking.

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