Jhe decision about when to start taking Social Security benefits is one of the most important for planning for retirement. Many people recognize that they can maximize their monthly checks by starting to take them at age 70, but that’s not always the best option. There is no right answer that applies to everyone, and each option has tradeoffs. Still, there are plenty of people who should be taking Social Security well before age 70, and there’s usually a major reason behind it.
In most cases, if it is preferable for a retiree to take Social security benefits earlier, it is due to the cumulative payments. You’ll maximize your monthly check by waiting until age 70, but there’s a catch-up game that takes a few years to play out.
Let’s take the example of a person who would receive $1,700 per month full retirement age (FRA). The Social Security program creates an incentive to delay receiving benefits, and this monthly check would change depending on the age the person starts collecting. The options would look like this:
- $1,190 per month at age 62
- $1,474 per month at age 65
- $2,108 per month at age 70
This is a relevant example because it is close to the current average benefit. Someone starting in FRA would have collected over $60,000 from Social Security at age 70. If that person started at age 62, that would yield the smallest possible monthly check, but that person would still be amassing over $114,000 in cumulative Social Security benefits at age 70. .
The break-even point for accrued benefits is between age 80 and 83 in these scenarios. If Social Security benefits were placed in a high-yield savings vehicle, the net breakeven age could be pushed back even further.
This creates a classic “bird in hand” scenario. It’s obviously great to maximize your monthly Social Security income, but there are many scenarios where it’s best to have cash on hand right now.
When do cumulative profits really matter?
With this trade-off in mind, each household must determine exactly how it relates to their personal circumstances.
For example, consider healthy people with long life expectancies who can easily cover their cash flow needs with retirement savings or a pension. They probably don’t need to supplement their cash flow with Social Security until they’re 70. These retirees have the luxury of maximizing their expected income and they will have the most guaranteed cash flow in the years to come. It may also increase the survivor benefits their spouse might receive, especially if the spouse does not have a work history on which to claim retirement benefits.
Unfortunately, this is not applicable to most Americans. Social Security is really important to most households. About 40% of people have no other source of retirement income. If you’re relying on Social Security to meet your cash flow needs, you obviously don’t have the luxury of delaying.
This could also apply to households that are not entirely dependent on these benefits. People tend to be more active early in retirement. That means more vacations, more dining out, and more time visiting with your grandkids. These costs can add up, and Social Security can be very important in ensuring that retirement accounts don’t run out too soon. Outliving your money is the biggest financial risk in retirement, and a guaranteed supplemental income stream is ideal for minimizing that risk.
People who choose to receive smaller payments sooner also might not lose income. The average life expectancy in the United States is around 79, so people should consider longevity when planning for retirement. Remember that it takes several years to break even on cumulative Social Security benefits for people who delay in favor of larger monthly checks. Many people who delay Social Security until age 70 will actually reduce the total amount they receive from the program if they die before age 80.
Social Security is a major part of your retirement financial plan. It’s important to consider all of your options, learn about potential outcomes, and make the best decision based on your personal situation.
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