Jacob: I bet that you're not thinking about optimizing your Social Security for this one thing. Hey, friends, welcome back to another episode of Retirement Answers. My name is Jacob Duke. I'm your host here as always. I also own retirement planning firm where we help people just like you plan smarter and retire better.
So today, I wanted to talk about something conceptually. This is not a how to necessarily or even some in-depth analysis. What this is, is a thought that I had the other day actually in the shower and you might be thinking, Jacob, do you ever stop thinking about retirement planning? And the answer is yes, sometimes. But in this moment, I was like, why are we always thinking about Social Security and getting the most out of it from a lifetime benefit perspective?
And what I mean by that is whenever it comes to deciding your Social Security timing and claiming strategy, we often view this as if I take it at 62 versus if I take it at 67 versus I take it at 70 or anywhere in between, I have to live to a certain age in order to get to the quote break even point so that I get all of my benefits that I paid in. And so if I take it at 67, I've got to live to 82 or 83 or whatever the breakeven point is for that, compared to if I had taken it at 62 and then passed away before I got to age 81 or 82, whatever the breakeven point was, it had been smarter to take it at 62 compared to 67 because I passed away too soon, right? So what we're evaluating there is, is we're trying to determine without knowing when we're going to pass away, we're trying to determine when to take our benefits in order to get the most out of them over the rest of our life. So really lifetime maximum benefits, we're trying to max that out or optimize it for that.
But today, I want to push back on this and say, what if you're optimizing for the wrong thing by thinking of it that way? Now, I'm not saying that it is the wrong way to think about it, just want to give you a question. What if it's the wrong way to try to optimize it? Instead, what I was thinking was this, what if we optimize your Social Security benefits and when you decide to claim them for when you might need your benefits most? Okay, so hear me out.
This doesn't necessarily apply to people who obviously need their benefits right away at 62 to meet their retirement income needs because they don't have the resources otherwise to do that. That's not what we're talking about here. I'm not saying delay it if you otherwise need the money. But if you have a million dollars, 2,000,000, $3,000,000, I can make the argument almost every time you can delay your benefits because you don't need the income right away. Keyword need.
But what if you needed more income at a particular point in life for different reasons? Let's think about this this way, your long term care or end of life care, whatever that looks like and kind of the arrangement there could be in home health care, it could be assisted living, it could be nursing, it could be whatever facility or level. What if you optimize for that period of time, rather than trying to maximize your total lifetime benefits? Because here's the thing, that period of time when you might need long term care, or assisted living or nursing home or in home health care, that is not based on an age necessarily. It's not based on, hey, when you're at 90 years old or 80 years old, it can be at any point because all of us have different lifespans.
It could be at 75, it could be at 70, it could be at 65. I mean, your age doesn't necessarily have a direct correlation with when you would need long term care. So here's what I was thinking about. What if we try to maximize our benefits, again, assuming that we don't need the income right away in retirement, so that whenever we do get to this stage later on down the road when we perhaps might need long term care or need assisted living, our housing costs and our care costs would go up because of that, what if we optimize to have the most potential income coming in at that stage because of this psychological reason. Whenever it comes to spending, we are as humans, we're going to try to spend as little of our portfolio as possible, because we don't know how long we might need it to last.
So just kind of think through this with me. If you had a million dollar portfolio, and you were going to be going into assisted living or nursing home care, and you're like, okay, I've got a couple options here. One is 10,000 a month, $17,000 a month and one's 5,000 a month, but you got a million dollars. And you have, I don't know, dollars 2,500 of social security coming in. Really, you're evaluating the difference between each of those costs minus 2,500, that's how much you need to take from your portfolio to meet your needs monthly.
If you run that math out, you can see well, on how much money I have and how many assets I have, how long I could have care paid for under these different cost arrangements. As humans, our default is going to be to go for the lower or middle tier most likely, not always, but most likely because it gives you a longer trajectory of being able to pay for your own benefits or healthcare that you need during this stage of life. So you don't know if you're gonna pass away today, tomorrow, next year when you're in this moment, right? You could live another ten, twenty years perhaps. And you don't know that yet, so you go with a more conservative approach of saying, I'm gonna go with the 5,000 to $7,500 cost for care because I don't know how long I might need this portfolio to last.
So you go with the cheaper route, which could be obviously a lower standard of living, a lower standard of care, the facilities maybe aren't as nice or as comfortable, those types of things. You're giving up that comfort or that, we'll call it lifestyle per se, in order to have a longevity to your portfolio. That's the psychological human element of this. If your Social Security seven is $2,500 and you have a million dollars. Now, I wanna flip this and say, what if you have a million dollars, and now instead of $2,500 a month of Social Security, what if you had $3,500 a month?
Does that change your decision here? Because in this moment, you would have more of your cost every month, $107,500 or 5,000, more of that would then be covered by your fixed income being social security, right? Therefore, you need less out of your portfolio, which means you could have your portfolio last longer, which could end up causing you to say, I'm gonna go with the more expensive option, the $10,000 option perhaps because of this higher fixed income benefit that's coming in every single month. Now, I'm not saying that this is the way you would do it necessarily. I'm just saying from a human emotional standpoint, if you have a higher fixed amount of money coming in, you would likely choose the higher cost benefit for yourself because you don't need as much money from a portfolio every single month to do that.
Does that make sense? And there's actually different studies on this, but kind of in a different way. When it comes to, you know, I'm not necessarily for annuities. I believe there's a way you can basically create the same thing by actually possessing and holding on to your money still. But from a psychological standpoint, there are studies that have been done that say retirees that have an annuitized income, whether it be from pensions or actually they went out and purchased an annuity and just have a monthly income getting sent to them every single month, they spend more than those who do not have any annuities or fixed income and just have a million or $2,000,000 portfolio.
Why is that? Because you can generate the same income from both places, annuity or from a portfolio of 1 or 2 or $3,000,000. But the problem is because the money is in a bucket, if you will, within your accounts and they're liquid and you can do whatever you want, You're more conservative because you don't want to see the bucket go down in value or you don't want to overspend too much. But if you don't have any money and you just have this constant monthly income stream, it's kind of like you can use it or not. You get 10,000 a month coming in from an annuity or annuitized payment system.
Great, I get this money in every single month, the rest of my life, it's guaranteed. Why would I need to save any of it? Let me just spend it all and enjoy it, right? So if we take that concept of, you know, people with annuitized income coming in and retirement typically end up spending more than those who do not have it. Take that and try to apply it to this scenario presented where, you know, if you have a higher benefit from a Social Security standpoint compared to just a higher dollar amount of assets, you would likely from a human and a psychological standpoint, be more inclined to go for the higher cost or better care or better facility in a long term care scenario at the end of life, if you had that higher Social Security benefit versus if you had a lower benefit and more money.
So that's the question I want to just give to you today. You know, are we optimizing for the wrong thing sometimes when it comes to Social Security? Now, this default just means that you should delay your benefits until 70 to get the highest potential benefit. And maybe that's the right answer. I don't know.
Everybody's different. Everybody has a different, you know, situation and it has different, you know, desires and goals and things like that. But I just wanted to just present that to you. Maybe it's just food for thought. I don't know if there's a solution here, I don't have the answer.
But I was just thinking about it in this way and my thought was what if we're optimizing sometimes for the wrong thing? Maybe we don't need to try to get the most out of the system over our lifetime. Maybe we just need the most at the right time. So I'll leave it there. I know this is a shorter episode, but I just wanna leave that with you and let me know your comments.
If you've got a question or like a suggestion or a comment, Jacob, here's maybe how I think about it. Shoot me an email. My email is gonna be listed below. Happy to have a conversation with you and just learn with you on this. So, I'd love to interact with you.
Shoot me an email. Let me know your thoughts. With that, I hope you have a great rest of your week. Thank you for tuning into this week's episode of Retirement Answers. I appreciate it greatly and share it with a friend if you found it valuable.
Thanks so much. We'll talk to you again very soon. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning into this week's episode.
I look forward to talking with you again next week.