Smart Choices, Big Rewards: How to Save as Much as $100,000 in Retirement

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Posted by The Savvy Retiree on October 31, 2019 in Money Saving Strategies

What do marshmallows and Social Security have in common? This sounds like the set up to a bad punchline, but the truth is that understanding the connection between the two can save you as much as $100,000.

At Stanford University in the late 1960s and early 1970s, a group of psychologists performed a series of studies on delayed gratification. In these studies, children were offered a choice between getting one marshmallow immediately or getting two marshmallows if they could hold off eating the first one for just 15 minutes. Some children waited, others didn’t.

And this is where Social Security comes in. One of the biggest financial decisions you will have to make around retirement is deciding when to start your Social Security benefits. Do you start withdrawing at age 62 or wait until age 70? On the one hand, you can withdraw early and receive your benefits for longer but at a reduced rate. On the other hand, you don’t receive any benefits for eight years, but when you do they’re at a higher rate.

On the whole, most people would conclude that each option has its advantages and disadvantages, that they both amount to pretty much the same thing over time. However, when put into practice, the reality looks a lot different. In fact, it can be as big a difference as having two marshmallows or having just one.

Consider this hypothetical… You have a twin sister named Gina. In many ways your life and Gina’s are mirror images: similar careers, earnings, savings, and a similar desire to retire at age 62 and explore what else life has to offer. What’s more, you each have a similar financial situation. You own a home with no mortgage, spend around $2,000 a month to live comfortably, have $200,000 in savings, and can start collecting $1,800 a month in Social Security benefits.

Once you retire, you start Social Security right away. Spending $2,000 a month, you have to draw down some of your savings each year. However, you conclude it would take over 80 years before your nest egg is wiped out, so you are not too worried. Years later, at age 81, you’re happy to tell Gina about how well you are doing: your Social Security check has kept up with inflation, so you have kept on budget and your savings are still over $150,000 (plus inflation). All in all, it couldn’t have worked out better…

But then Gina tells you how happy she is with her finances. She says she collects about $3,200 a month from Social Security and has just over $160,000 in savings that grows at a rate of about $14,000 a year.

How can this be? At 62, you were both in the same financial situation. Now, Gina has more savings than you and receives more in Social Security.

You realize that Gina waited until she was 70 to claim her benefits. By holding off at 62, she now receives 76% more than you do. Sure, she had to use most of her nest egg to afford $2,000 a month until age 70. But once she reached that age, she started saving $1,200 a month from her Social Security, while still spending $2,000. The result is that at age 81, she has saved slightly more than you have, and she’s collecting a much bigger check each month.

How you claim your benefits can have an enormous impact on your overall financial well-being and security, taken over a lifetime. At age 62, your life expectancy is a bit over 86, and if you reach that age, having waited until 70 to claim Social Security, you will have saved as much as $100,000 more than someone who claimed their benefits from age 62.

Look, I get that relying on your nest egg for eight years can feel counterintuitive to the idea of protecting your savings. But, in the end, the goal is to have enough money to live well, no matter what age you reach. The later you wait to claim, the more you tip the scale in favor of achieving that goal. And if circumstances force you to claim benefits before 70, you can always do so.

Now, you might have read the example I described above and thought to yourself, “Well, I don’t have a $200,000 nest egg to dip into, and I still have a mortgage to pay. How does this apply to me?” Of course, everyone’s financial situation is different. But you have more options available to you than just claiming at 62 or spending your savings while you wait to claim at 70. You just have think creatively about how you spend.

Consider the couple who decides to fulfill a lifelong dream and spend time RVing through North America. They buy an affordable, gently-used RV, travel for as long as they like—perhaps even renting out their home in order to cover their costs—and then, when they’re ready, they can sell their RV for almost as much as they bought it for. This adventure of a lifetime can cost even less than staying at home on a $2,000 monthly budget.

The point is, no matter what your financial situation, there are many ways for you to live life to the fullest while you avoid spending your savings and wait to reap the full benefit from your Social Security. You don’t have to sacrifice self-fulfilment to live comfortably. The retirement you want is always within reach when you understand the choices in front of you.

Years after the initial marshmallow experiment, the Stanford researchers checked in on the children—now all grown up—who had taken part in the study. A revealing pattern had emerged. The children who had waited for the second marshmallow tended to have had found more success in life overall. Despite having started out with the same as everyone else, by understanding their choices they had reaped the greater reward.

Written by Steve Garfink