Social Security: Take it now or later

When it comes time to retire, most federal workers — CIA agents, TSA screeners, NASA rocket scientists or letter carriers — have some choices, most of them good, to make.

Their annuity for life is set based on the plan they are under — the Civil Service Retirement System (CSRS) or the Federal Employees Retirement System (FERS). It will depend on their highest 3-year average salary and service. The CSRS annuity is more generous, and workers pay more for it.

FERS employees qualify for Social Security (which they pay for) and their TSP account should be larger, thanks to the government 5% match. FERS employees — except for law enforcement, air traffic controllers and others forced to retire early — don’t get inflation catchups until they are age 62.

There are a number of tradeoffs. But for FERS employees, the Social Security decision — as to when to take it — looms large.

Delaying it until age 70 can increase the payment-for-life by 68%. Each year they hold off collecting Social Security, the FERS Social Security benefit goes up 6% to 8%. A pretty good return under any circumstances. Especially when guaranteed by the U.S. government — at least so far.

The decision to either take it early or wait can be tough. People run their own family life expectancy numbers. Some want to collect as soon as possible in the event they don’t live very long!

Others opt to wait and increase the benefit. To them it’s not a matter of “losing” money because if you’re dead, you’re dead.

A number of factors come into play in the now-or-later decision. An important, less emotional one is whether you consider Social Security insurance or an investment. Fair enough.

Last week we had a column featuring an exchange between two very smart people who looked at the Social Security decision from two very different standpoints. Both made their case. Here’s how a career Energy Department employee sees it:

You asked, is it Insurance or investment?

Well, is an annuity or insurance an “investment”? They are usually sold as investments, usually by insurance salesmen!

And FICA has the word insurance in it. But it is different than most insurance, which pays if something BAD happens, like a fire, flood, car accident, vacation interruption, sickness, AFLAC, etc. So is this insurance, in case I keep on living?

Maybe it is. But most people consider it as more like a long term investment program, even though it is paid by a tax, and the payout is at the whims of Congress (the Supreme Court has already ruled on that). Congress could legally reduce or terminate all Social Security payments tomorrow.

Well, first they would have to be able to agree on which day of the week it is, so reductions are not likely anytime soon.

If it were truly insurance — that is, a traditional annuity managed by an insurance company — it would run afoul of the State Insurance Commission, because it is not even close to being solvent in the long term, and also possibly for mishandling the investing of the contributions.

By the way, back in high school we had a guy from Social Security come and talk about our “contributions”. He did not mention the word tax. But that and the solvency is a very different topic.

Like you said, the question of when to take it depends on circumstances. If you can afford to retire at 62, then you will do so. You can delay getting your “insurance” if you want to. If you can continue to work until 66, 67 or 68, I suggest you do so. At 66 (or your minimum full retirement age) you can start collecting and still keep working without any loss of benefits (85% of the Social Security benefits will be taxed. Are any other insurance payments taxed?).

The question is, do I start collecting my insurance now, or do I wait and collect a slightly bigger payment later? The previous respondents have provided the math, which is pretty close to what I got (slight variation in how you set up the problem, how to include COLAs, how to include additional working years, give you slight variations in the results). But whether it is 125 or130 months is not really important.

Do you need the payment now? Like paying for extended family education, illness, etc. (a probability of 100%)? Compare that to how you might need a few extra dollars at age 90. Or maybe you think you could get a better return investing it yourself than whatever the actual return on investment would be by delaying collecting your insurance. For example, you could invest in 5-to-10 year treasury obligations.

Yes, it is officially insurance, but it was sold as a “retirement savings plan.” And it sure looks, walks and quacks like an investment.

Nearly Useless Factoid:

By Jonathan Tercasio

In the 1928 Olympics, Australian rower Henry “Bobby” Pearce stopped his boat while leading in the quarter-final race to let a family of ducks cross the canal. His opponent took advantage of the pause to create a five-length lead — but Pearce eventually caught up and won the race. He went on that year to win the final.

Source: BBC

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THRIFT SAVINGS PLAN TICKER

Sep 17, 2021 Close Change YTD*
L Income 23.2077 -0.0415 4.43%
L 2025 12.0240 -0.0418 8.33%
L 2030 42.5522 -0.1952 10.54%
L 2035 12.7953 -0.0643 11.50%
L 2040 48.4773 -0.2641 12.46%
L 2045 13.2947 -0.0772 13.28%
L 2050 29.1552 -0.1795 14.12%
L 2055 14.3671 -0.1053 17.18%
L 2060 14.3671 -0.1053 17.18%
L 2065 14.3671 -0.1054 17.18%
G Fund 16.6644 0.0006 0.88%
F Fund 21.0666 -0.0298 -0.55%
C Fund 66.6676 -0.6128 21.56%
S Fund 85.0861 -0.0794 16.31%
I Fund 39.4469 -0.3006 11.70%
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