The #1 Reason to Defer Taking Social Security
There are countless arguments to be made when to take Social Security. It’s easy to “prove” if you should take it early. It’s also easy to “prove” if you should delay until you reach 70.
The problem with each of these points, of course, is they are all premised on an IF THIS HAPPENS THEN THAT WILL BE THE BEST STRATEGY. For example, if you can get a greater than 5% a year return you should take Social Security early. Or, if you live until your 90’s you should take Social Security late.
But given these unknowns it’s an impossibility to prove anything in terms of when the best time to file for Social Security will be.
However, assuming you live to your normal life expectancy, around 85 years old or so, the number one consideration in when to take Social Security is future investment returns.
Let’s dive into this a bit.
I was born in 1970. The S&P 500 has averaged 11% a year since then. If I could average 11% a year on my investments, it would only make sense to take Social Security EARLY.
But maybe those 50 years were an anomaly after all the U.S. stock market has been around much longer than 1970. In fact, we can go back all the way to 1871. Since then, we’d have averaged 9.15% a year. That means your money doubled every 7.86 years over the course of 150 years. Not too shabby, eh?
Since the ‘modern era” of the U.S. stock market, 1926, the S&P 500 has averaged 10.13%.
So, you can see that historically the US stock market has given us returns that would make taking Social Security early a no-brainer. Even if you didn’t need the income you’d be better off having taken it early and investing it in order to maximize your total net worth. That is the argument I hear all the time. And it is a correct argument, if you get historic investment returns.
BUT… what if you don’t? We don’t want to succumb to home-country bias where you see things solely through the filter of the country you reside. There is a huge world out there and just because the U.S. has escaped the carnage the rest of the world has witnessed doesn’t mean we will.
Oh, and when I mean carnage, I’m not talking about war, pestilence and socialism, I’m talking about good,ole-fashioned market declines.
Let’s look at Japan.
You remember Japan don’t you? EVERYONE wanted to be like Japan in the 1980’s. Check this out:
The above was written by none other than Martin Feldstein, who was going to be named Chairman of the Federal Reserve Board until AIG, for which he sat on the Board, got destroyed in 2007. Yet, Feldstein in 1988 stated “there have been increasing efforts to find lessons for the United States in the Japanese experiment.”
Feldstein, of course, had no clue what would begin to transpire in Japan in literally one year’s time. Which, if there were any accountability, would have reduced his stature among economists but economists exist for one purpose…to make astrologers look good.
30 years after Feldstein’s completely incorrect article we, in the U.S., can indeed learn from the Japanese experiment. Here’s how:
That’s some ugly stuff. Not including 2020 if you invested in the Nikkei in 1990 you’ve averaged all of .96 per year., less than 1% annually. From 1990 through 2003 you averaged -9.03% annually. That’s a NEGATIVE 9.03% each year. A $100,000 investment in 1990 would be worth all of $22,000 by the end of 2002, and that’s without drawing anything from the portfolio.
If you were to have the misfortune of taking 5% a year out of your portfolio starting in 1990 and adjusting for inflation you’d have run out of money before the decade was even up.
Now, if you follow me at all, you know I’m a HUGE proponent of the Barbell Retirement Plan. You can read about it in my most recent book, Retire With the Wellington Fund. (I’m working on forthcoming coming book dedicated solely to the Barbell Retirement Plan.)
Sadly, though, even the Barbell didn’t save you from the carnage that was Japan in the 1990’s. You ran out of money in year 12 of your retirement. Not good.
So, while many people will be convinced that what happened in Japan can not happen here, I simply ask, why not? What makes you think Japan is not our future. Past performance of the US markets? Well, hell’s bells, from 1950 through 1989 the Nikkei averaged 18.69% annually. That means an investor doubled his money every 3.85 years!
Oh, by the way, that’s over 4 decades of time too, post World War II. No one, and I literally mean NO ONE, was saying in 1989 that Japan was doomed. As I showed you in the article above the highly-acclaimed economist, Martin Feldstein, was singing the praises of Japan in late 1988 and if you want to sleuth more you can find economist after economist doing the same.
I absolutely despise the idea that “it can’t happen here.” It can’t…until it does. And if it does you know what will save you? Social Security. And trust me, you’ll be very glad you deferred taking Social Security due to the fact that you’ll get 75% more in tax favorable benefits by taking it at 70 then you did if you took it at 62.
Oh, I hear ya, the peanut gallery, “Oh, so Josh, you think Social Security will still be around if the markets crash like what happened in Japan???”
Yes. Yes I do. If Social Security goes, the country goes full revolt. No two ways around it. Full revolt is not what the ruling classes desire and as such they’ll do whatever they can to keep the bread and circuses in business to occupy our time. And that means making sure we have enough money to get by, barely. But it will be just enough to keep the masses entertained.
So, while that mean seem far fetched, do you really want to risk it? You always need to go into retirement with the idea “What if I’m wrong?” And if so, “What do I do IF I am wrong?”
Think about it long and hard before you make a decision based on what seems a historical norm, the U.S. stock market, that actually may prove to be a historical oddity.