You probably shouldn’t wait till 70 to claim Social Security. Here’s math to open your eyes (but nobody likes to show)
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On paper, it seems pretty clear that the best way to optimize your retirement is to delay applying for Social Security as long as possible.
According to the Social Security Administration, receiving your benefits as early as possible (age 62 for those born after 1960) may result in lower monthly payments. At age 67, you are eligible for full benefits, but if you delay your claim until age 70, you can benefit from a total increase in monthly benefits of 24%. Once you reach 70, your monthly earnings do not increase.
With this in mind, many financial planners recommend delaying claiming benefits as long as possible until you reach age 70. But this relatively simple math overlooks some important variables that may shock some retirement planners.
“Unless the individual has a low discount rate and/or is confident he or she will live several years beyond life expectancy, age 70 is not the most financially rewarding age to start benefits,” says an article published in the Journal of Financial Planning by professors of economics at Yale University and Pomona College (1). The discount rate is the average expected rate of return that represents the present value of all your future payments. It’s used to decide whether Social Security is worth waiting for.
They said their calculations “do not support the assumption that the vast majority of people who choose to start Social Security retirement benefits before age 70 are making a mistake.”
That’s why some academics suggest that early retirement may be a better option for some.
When recommending delayed benefits, academics and economists use simplistic and generalized assumptions that do not fully reflect the reality of most retirees. That’s according to Derek Tharp, a financial advisor and associate professor of finance at the University of Southern Maine.
In an article published in The Wall Street Journal, Tharp argues that this simple spreadsheet calculation assumes that “future dollars will be worth about the same as today’s dollars” (2). This assumption is based on another assumption: A retiree invests primarily in ultra-safe assets that provide little or no return after inflation.
By doing this, economists missed the opportunity cost, which is the payoff from the option given up.
“Most people don’t have portfolios consisting of assets that earn just 0% to 2%. Instead, their portfolios hold a mix of stocks and bonds that have historically yielded returns closer to 5% above inflation,” he wrote. “This difference is not a matter of trivial academic assumptions. Assuming you’ll earn about 5% of Social Security income instead of less than 2% can completely change the math; it makes delaying benefits much less attractive.”
Retirees who delay filing for Social Security may also need to reduce their savings and investments to cover living expenses, hurting their nest egg and future returns.
Another risk to those who delay benefits is mortality, according to Tharp. According to the Center for Disease Control (CDC), life expectancy is 78.4 years, but your individual life expectancy may differ from this overall average. If you die early, Tharp says, “you could be leaving hundreds of thousands of dollars on that table that could otherwise be spent on loved ones or causes that someone cares about.”
To account for these risks, he recommends using a higher discount rate when calculating the present value of future benefits.
“Retirees with modest portfolios, health concerns, or a tendency to underspend may see effective discount rates of 6%-8% or more, shifting decisions strongly toward early application,” he writes in an article for Kitces (3). “Conversely, retirees who have significant resources and are less vulnerable to policy or set of return risks may still benefit from delaying until age 70.”
If you need help deciding when to collect Social Security, it may make sense to talk to a professional counselor. They can help you prioritize, plan your future, and find the right timeline for your specific needs.
Vanguard’s research shows that working with a financial advisor can add about 3% to net returns over time. If you started with a $50,000 portfolio, professional guidance could mean more than $1.3 million in additional growth over 30 years, depending on market conditions and your investment strategy.
Finding the right consultant is very simple advisor.com. Their platform connects you with licensed financial professionals in your area who can provide personalized guidance.
A. professional consultant It can also help you determine how many years you have left to invest before retirement and assess your comfort level with market fluctuations, two key factors in creating the right asset mix for your portfolio.
Using a higher discount rate, as Tharp suggests, can help cover any financial risks you face when deciding when to start claiming Social Security benefits. However, it does not cover the lifestyle factors that are vital to this decision.
A dollar is not only more valuable today than tomorrow, it is also more resilient. Your income in your 60s may be much more beneficial than in your 80s, when your health and mobility may be limited. According to the World Health Organization, the average healthy life expectancy in the U.S. is just 63.9 years, so if you delay benefits until age 70, there’s a chance you’ll lose out on some of the best years of your retirement.
These factors may be why the average retirement age in the United States is 62, according to MassMutual (4) , and why only 10% of retirees wait until age 70 to claim benefits, according to the Bipartisan Policy Center’s analysis of SSA data (5) .
If you’re worried about rising costs depleting your retirement savings when you’re no longer earning income, you’ll want to find ways to cut spending and take advantage of discounts where possible.
Organizations like AARP We offer older adults discounts on nearly everything, from prescriptions and dental plans to travel, entertainment and insurance.
AARP, one of the most trusted organizations for older Americans, not only offers money-saving benefits but can also help you make informed financial and health decisions.
AARP members have access to guides that can help you Get the most out of Social Securitychoose the right Medicare plan and unlock other government benefits; potentially saving you thousands.
A simple spreadsheet calculation does not cover all the risks and nuances of your personal finances. So instead of delaying Social Security for as long as possible, use better assumptions and a higher discount rate to calculate the true present value of cash flows from benefits.
You’ll also want to make sure you have an emergency fund ready and a health care plan.
There are many high-yield accounts on the market, but it pays to seek out and store your emergency funds with the company that offers the highest interest rate available. And if they suddenly lower interest rates, start shopping around again and make sure you move your money to where it will earn the most interest.
SoFi With no fees, no monthly maintenance costs, and no minimum balance requirement, it offers a high-yield account you may want to consider.
Deposits are insured up to $250,000 through SoFi Bank, with up to $2 million in additional coverage through the SoFi Insured Deposit Program.
As you begin creating a retirement plan that focuses on your finances, you’ll also want to create a plan for your physical health when you no longer enjoy the benefits of work.
Without proper planning, paying for long-term care can quickly deplete your retirement fund. In many cases, the burden of paying for care falls on family members, which can put a strain on their finances.
Instead of hoping your health will improve, you might consider: long term care insurance to help pay the bill. Covers the cost of in-home help, nursing homes and assisted living facilities.
GoldenCare Hybrid living, or an annuity with long-term care benefits, offers different options based on your needs, including short-term care, long-term care, home health care, assisted living, and traditional long-term care insurance.
We rely only on vetted sources and reliable third-party reports. For details, see editorial ethics and rules.
Journal of Financial Planning (1); Wall Street Journal (2); Cats (3); MassMutual Retirement Happiness Survey (4); Bipartisan Policy Center (5)
This article provides information only and should not be construed as advice. It is provided without any warranty.
