A recent Stanford retirement study caught my attention. The authors evaluated nearly 300 scenarios and concluded that the best way to maximize income is to start social security at age 70. As a millennial, it may be difficult to conceive of life 30 to 40 years from now, but other studies show that by merely thinking about our older selves in specific and tangible ways, we can improve our long term financial health. I appreciate that the Stanford Center for Longevity study elicits this mental exercise, however their recommendation strikes me as a little off base. I’ll discuss some alternatives.
Firecalc.com generates a completely contrary set of outcomes. It’s model runs individualized monte carlo simulations of all investment outcomes using real stock and bond market results. By taking the earliest social security payments, other assets, hopefully under tax preferred status, have more time to continue growing, resulting in overall better chances of bigger retirement assets. I find this method takes a more holistic view than the “guaranteed income” objective of the Stanford study.
I use my own personal model which breaks down holdings in more nuanced ways to account for taxes and different life events and expenses because the amount of time that you can stay invested is a very important factor in maximizing returns. As a millennial, I know I have a long time horizon so it’s not as important to worry about maximizing income because income is a function of assets. This approach is also fun (for me).
A different way to look at this issue is from the expense side. Throughout our personal economic lives the basic equation of personal finance is supply of money and demand for money, our income and expenses whereby the difference goes to savings or debt. Most strategies and advice focus on increasing income, but by reducing expenses, it is possible to put more to savings, which opens up even more retirement outcomes.
We see that there is a very wide range of retirement planning strategies available, which differ depending on their objectives. Even hundreds and thousands of scenarios don’t represent the millions of individual situations. As millennials, we are fortunate to have longer time horizons to observe and actively choose which strategies to pursue and maximize our financial goals.