This is the second in a series of posts looking critically at an excellent counterargument to early retirement from The White Coat Investor.
The first article in the series can be found here.
Today’s argument deals with the variable value of Social Security.
The first part of the argument is this:
For some bizarre reason, a lot of people have stopped planning on having any kind of Social Security when they’re retired. I don’t think this is wise. Social Security is an extremely popular program, and honestly, it’s one of the best government programs out there. Fixing it is a simple math problem (unlike Medicare.) Raise taxes a little bit, decrease benefits slightly, and increase the full social security retirement age slightly and voila, it’s solvent for centuries.
I actually have no criticism of this statement. I think that it is 100% correct. To summarize;
- Social Security is a wonderful and politically popular program.
- The doom and gloom surrounding the solvency of Social Security is very much overstated.
- As mentioned above little tweaks to it will extend the trust fund out indefinitely.
- Additionally Social Security’s solvency is often conflated with the national debt which it shouldn’t be. It is a separate trust fund. (My point)
So let’s move on to the heart of the argument:
As an early retiree at 50, you don’t get to count on that income for at least the first 12 years of retirement, and possibly for the first two decades. How much income are we talking about? Well, the maximum social security benefit for 2011 was $2366 a month. That assumed one started working at 21, paid the maximum each year, and retired at age 66. Adjusting that for age 70 (about 8% a year) gets you to $3219 a month. Remember that your spouse will also have a benefit. Just to make things easy, let’s assume the spouse gets ½ of your benefit. That’s a total of $4829 a month, or $57,948 a year, adjusted to inflation. When you consider Social Security, the doc who retires at 70 only needs to save 5% of his income each year versus the early retiree’s 38% (almost 8 times as much savings). Granted, the early retiree will also eventually get a Social Security benefit, but if you don’t get it for 12-20 years, and you need your stash to last an extra decade or two, you really can’t use a more aggressive withdrawal rate to make up for it.
It is certainly accurate that the early retiree will not be able to tap Social Security at least until age 62, and preferably until age 70. But by saving a healthy portion of his take-home income, the early retiree no longer needs Social Security. The assumption that allows him to retire early is that he is living off of the safe withdrawal rate of his nest egg.
This means that early retirement planning is very much based on a worst case scenario (a world with no Social Security) which, In turn, means that any Social Security that he eventually gets will be pure gravy; welcome additional income in his old age.
I do like the statistic about the 70-year-old physician only needing to save 5% of his income compared to the 50-year-old early retiree who needs to save 38% of his income.
But there is, of course, another way of looking at this. The 70-year-old retiree has to work 100% longer (40 years of work instead of 20 years of work) in order to live at the same level of income in retirement as the early retiree who saved 33% more of his take-home pay.
Viewed in this light, and postulating that minimal happiness was lost to decreased spending, isn’t this additional 33% saved extremely well compensated?
Which brings us to the final part of the argument around Social Security.
To make things worse, the early retiree gets slightly less Social Security when it finally does kick in because he paid into the system for less than 35 years.
This is a valid criticism.
There is no getting around the fact that if you work less than 35 years your ultimate Social Security payment will go down.
My suspicion, though, is that the money that you will save by not paying into Social Security for an additional 20 years, when invested, will be worth more then the money that you will eventually lose due to smaller Social Security payments.
Full disclosure: I did not actually do this calculation because I do not know how (if you do, please fact check me.) But my justification for this assumption is that the Social Security trust fund is invested in treasuries and it is expected that your portfolio (which will include some proportion of higher risk equities) will produce higher returns in the long run.
So as always it comes down to the question of how much additional happiness you lose for each additional fraction of savings percentage that you commit to.
Which is why I am not unlike a broken record. This ends up being the crucial question in deciding when you want to retire, no matter how I spin it.
