Clients often wonder when they should start their Social Security Retirement Benefits. With friends, family, and media offering different opinions, the decision can feel overwhelming. The truth is, "it depends." There's no one right time to take Social Security—it's unique to each person. We'll explore different approaches together, helping you find the best choice for you and your family.
Misconception: It is always best to delay your Social Security withdrawals as late as possible.
Reality: In some instances, it may make financial sense to delay taking Social Security until 70. There are also many reasons to take it earlier.
The Breakeven Age1
* the chart on the left shows taking Social Security at 62 vs. 67 & 70
These charts illustrate that if you delay Social Security at a later date:
- Breakeven rate at taking social at 62 vs. 67 is 77 years of age
- Breakeven rate at taking social at 62 vs. 70 is 78 years of age
Delaying Social Security is a bet on longevity. You are assuming that you will outlive the breakeven rate. Considering the charts above, the decision appears easy—many Americans live well past 77 and 78. However, I believe these breakeven calculations are misleading. The standard breakeven age calculations many companies and individuals often neglect the “OpportunityCost” of money. I updated the breakeven tables to include an opportunity cost of money, where the money earns a rate of return rather than being stagnant.
The Chart above, shows the breakeven rate on a hypothetical individual applying for social security and how the lifetime income would look given a 5% rate of return on money. Similar to today’s rates of CD’s. What it shows, is that given the introduction of the opportunity cost of money, being able to invest your dollars at a rate of 5%, the breakeven rate moves out further on the timeline well into the 80’s.
The breakeven rate at age 62 vs. 67 increases from age 77 to 83 (shown in yellow), while the breakeven rate from age 62 vs. 70 increases to age 85 (shown in blue). Given this information, would you hold off on taking social security until 70 given the chance to draw at age 62 knowing that you wouldn’t come out financially better until you are 85 years old? While this doesn’t require an immediate or definitive answer, it is supposed to give you something to consider and think through the implications of holding off on taking social security until the latest possible moment.
The Mortality Table2
The Mortality Table illustrates life expectancy of Males & Females living in the United States.
- Odds for Men to live until 83 is 36.2% and at 85 is 29.8%
- Odds for Women to live until 83 is 51.8% and at 85 is 44.8%
While we always want to bet on longevity, it may be worth a second look at the benefits of having immediate use of the money.
Considerations:
- Family health records, did your relatives live long healthy lives or did they have shorter lives with more health complications?
- Do you yourself have any health complications?
- Are you good with money and have self-control when it comes to excess spending?
While nobody can predict the future and no individual is a number on a chart, it is important to consider statistics to make the most prudent decision.
TAKING SOCIAL SECURITY EARLY
The main benefits of taking Social Security early are:
- Making use of the money early and saving more of your other investment assets.
- Maintaining purchasing power if inflation outpaces Social Security cost-of-living adjustments (COLAs)
Making use of Money Earlier
If you need the money now, take Social Security early! Taking the funds earlier protects you in two ways: it ensures you get the money in case you don't live to the breakeven point, and it helps preserve other investments by not having to draw from them.
Inflation Protection
If we are to look at the US CPI & inflation rate over the last few decades, it could be argued that it underrepresents true inflation (see our blog Government Data and Inflation Measures). If inflation is understated, taking money earlier will help protect your purchasing power if you can invest the funds. While the difference in the stated inflation rate and real inflation rate may not be large, it adds to the benefits of drawing funds earlier to reduce the effect of understating inflation as you are able to use those dollars immediately rather than have them continue to be devalued by inflation over time.
DELAYING SOCIAL SECURITY
While there are major benefits to drawing Social Security early, there are also many reasons to hold off taking Social Security. A few cases are:
- Married couples & spousal benefits
- Substantial assets held in IRA or retirement style accounts
- Lack of investable assets or alternative retirement income
- Poor money management skills
Married Couples & Spousal Benefits
For married couples, where one spouse’s Social Security retirement benefit is substantially higher than the other’s:
- It may be beneficial to delay taking higher earning spouse’s Social Security and draw on the lower earning spouse’s Social Security.
- By delaying the higher earners Social Security until age 70, it protects both spouses should either pass away early. If the spouse with the higher Social Security benefit passes, the surviving spouse would be able to draw the higher benefit while giving up their own lower paying benefit.
- Delaying Social Security Retirement Benefits also guarantees a higher income. Waiting longer allows you to lock in a higher payment.
When considering Spousal Benefits, it is important to gauge whether you or your spouse qualifies. Normally if an individual makes less than half of the Social Security benefit of their spouse, they are eligible for spousal benefits. When taking spousal benefits, consider:
- The spouse with lower benefits should not delay taking Social Security after age 67. See the below payout rates at different ages:
- Spousal benefit of up to 33% of larger benefit at age 62
- Spousal benefit of up to 50% of larger benefit at age 67
- Spousal benefit of up to 50% of larger benefit at age 70
* Spousal benefits cannot be taken until each spouse is collecting Social Security. Married couples’ ages and age differences may complicate deciding when to take benefits.
Large IRA Assets
If you have substantial assets in your Qualified Retirement accounts like a traditional 401k or IRA and you have the ability to retire prior to age 70, delaying Social Security could be beneficial. By delaying social security benefits until 70, you can draw funds from a Qualified Retirement account at a lower tax rate prior to drawing social security. This strategy is likely advantageous in the long run since it allows you to deplete some of your taxable assets during low tax years.
Lack of Retirement Assets & Poor Money Management Skills
Individuals with few retirement assets may want to consider holding off on Social Security Retirement Benefits for as long as possible. Delaying benefits will lock in a higher stream of income. Social Security is often the bedrock of retirement planning, and many benefit from higher annual income source if they can hold off on drawing until the latest moment.
If you also find yourself in a category of people who might not practice the most prudent money management skills, it may also be wise to consider holding off on drawing Social Security until the latest possible moment. The higher social security benefit provides a financial floor, helping protect you if you outspend your savings.
The examples and scenarios we've discussed may not fit everyone's situation perfectly. Everyone's different, and there are factors to consider that might make taking Social Security earlier or later better for you. It's crucial to talk to your financial advisor to figure out the best timing for you. Your decision could save you a lot in taxes or boost your lifetime income.
1 Breakeven calculation chart is based on Social Security Delayed Retirement Credits
2 Mortality Table, 2020 Social Security Accurial Table