Retirement Tip of the Week: When to Take Social Security

The following first appeared on Money & Markets.

I focus on dividend strategies in retirement. A good stream of dividends can make the difference between living well in retirement and moving in with your kids.

But it’s a mistake to overlook Social Security because this is the single most importing source of income for most retirees. Around a quarter of all retirees depend on Social Security for 90% or more of their income, and a little over half of retirees depend on Social Security for at least half of their retirement income.

Today, we’re going to cover that all-important topic of when to start taking your benefits.

When to Start

Unfortunately, you’re going to have to ask yourself some uncomfortable questions. You’re going to have to be honest with yourself about how long you expect to live. If you’re not in the best of health, take your benefits early. If you’re in reasonably good health and your family has a history of living to a ripe old age, you should do everything you can to wait until age 70 to start taking benefits. Let’s dig into the details.

The precise Social Security benefit you will be entitled to will vary based on a number of factors such as years worked, income level, etc. But the maximum benefits for a person filing for Social Security benefits in 2020 shakes out like this:

  • $3,790 per month for a person filing at age 70
  • $3,011 for someone filing at “full” retirement age of 67
  • $2,265 for someone filing early at age 62

There is a massive $1,525 difference per month between taking benefits at 62 vs. waiting to 70. That’s fully 67% higher.

Of course, this only makes sense if you’re relatively healthy. The “break even” age when your cumulative benefits starting at age 70 catch up to the earnings from starting at 62 or 67 is around age 82. So, if you think it’s unlikely you’ll live to 82 due to your family’s health history, it probably makes sense to take the money earlier.

Our government doesn’t always make the best decisions. I think that’s probably an understatement. But the ages they chose for the Social Security cutoffs are no accident. The current life expectancy for the average American is 78.7 years. And for some demographic groups, the number is a fair bit lower than that.

The government knows that, with a large enough sample size, it will “make money” by incentivizing retirees to postpone their benefits to age 70. If the average American croaks 3.3 years before the breakeven age, that’s 3.3 years of benefits they didn’t have to pay.

So, be honest with yourself. If your parents or grandparents survived well into their 80s, 90s or older, the odds are in your favor to making past the 82-year-old break-even point. If your family tends to die younger, your odds aren’t as good.  It’s always something of a gamble, of course, and any of us can get hit by a bus tomorrow. But if you expect to live to a ripe old age, postponing Social Security until age 70 can add hundreds of thousands of dollars to your income over the course of your retirement.

This is probably the single most important financial decision you’ll make in retirement, so make sure you give this one some serious consideration.