Social Security and the Time Value of Money


There are few decisions at retirement more difficult than choosing the right strategy for collecting Social Security retirement benefits.  No matter their level of wealth, most of my clients start with a common goal:  “Maximize the amount I can collect over my lifetime”.  Developing a strategy to meet this goal would be easier if they could tell me exactly how long they will live, but their goal is not surprising.  Most of what we read on the topic and many of the available analytical tools are based on a similar goal.  However, I wonder if a better goal would be to develop a strategy that maximizes wealth over one’s lifetime?  For those with significant retirement resources outside of Social Security, I have found that the two goals are not always the same.

Those with few available resources at retirement usually need to take their benefits when their paycheck ends.  However, anyone who has significant financial resources at retirement faces a myriad of complicated options for collecting their benefits, each with a different impact on their other financial assets.  To ignore this impact would be a mistake, which is demonstrated by a recent client experience.

Tom and Judy worked their entire lives to build a successful business.  They faithfully paid in to Social Security and were interested in maximizing their “investment” at retirement.  Another advisor offered to analyze Tom and Judy’s collection options.  He utilized a commonly available Social Security analyzer focused on maximizing the aggregate lifetime benefit to develop a suggested plan.  Tom and Judy are both very healthy and have a long life expectancy, so it was not surprising that the analysis recommended putting off collecting their primary Social Security benefits until they were approximately 70 years of age.  When combined with certain steps designed to take advantage of various available spousal benefits, the suggested strategy did maximize Tom and Judy’s aggregate benefit over their lifetimes.  They were puzzled as to why these results were significantly different than anything we had ever discussed.

I informed them that my analysis focused on the fact that their living expenses would be taken entirely from their investments until they began collecting Social Security benefits.  This would force earlier than necessary taxation on IRA withdrawals and immediately begin reducing the amount of investments available for long term growth.  By ignoring the time value of money issues, the suggested strategy resulted in Tom and Judy exchanging growth oriented assets for slower growing Social Security benefits.  When they were included in a comprehensive analysis however, it became clear that there was a high likelihood Tom and Judy would create more wealth over the long haul by collecting Social Security benefits earlier in their retirement and allowing their investments to continue to grow.

Needless to say, Tom and Judy were thrilled with the analysis. Acknowledging that individual circumstances can vary widely, anyone with significant retirement resources should go beyond the common wisdom about Social Security collection and have an analysis performed that considers taxes and the time value of money.