The decision about when to start taking Social Security benefits is one of the most important for retirement planning. Many people recognize that they can maximize their monthly checks by taking them by age 70, but that’s not always the best option. There is no right answer that applies to everyone, and each option involves trade-offs. Still, there are plenty of people who should be taking Social Security much earlier than age 70, and there’s usually one major reason behind it.
In most cases, if a retiree is better off taking Social Security benefits earlier, it’s due to cumulative payments. You’ll get the most out of your monthly check by waiting until 70, but there’s a catch-up that takes a few years.
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Consider an individual who would receive $1,700 per month at full retirement age (FRA). The Social Security program creates an incentive to delay receiving benefits, and that monthly check would change depending on the age that person starts collecting. The options look something 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 as it is close to the current average payout. Someone who started at FRA would have collected more than $60,000 from Social Security by age 70. If that person started at age 62, it would make the smallest monthly check possible, but that person would still be accumulating more than $114,000 in cumulative Social Security benefits by age 70.
The break-even point of the cumulative benefits in these scenarios is between 80 and 83 years. If Social Security payments were put into some high-yield savings vehicle, the net break-even age could be pushed back even later.
This creates a classic “bird in the hand” scenario. It’s great to maximize your monthly Social Security income, of course, but there are plenty of scenarios where it’s better to have cash on hand right now.
When do cumulative benefits really matter?
With this trade-off in mind, each household must determine exactly how it relates to their personal circumstances.
For example, think of healthy people with a long life expectancy who can easily meet their cash flow needs with retirement savings or a pension. They probably won’t need to supplement cash flow with Social Security before age 70. These retirees have the luxury of maximizing their projected income, and they will have the greatest guaranteed cash flow over later years. This can also increase the survivor benefits that their spouse might receive, especially if the spouse does not have a work history from which to claim retirement benefits.
Unfortunately, that doesn’t apply to most Americans. Social security is very important for most households. About 40% of people have no other source of retirement income. Of course, if you depend on Social Security to meet cash flow needs, you don’t have the luxury of procrastinating.
This may also apply to households that are not fully dependent on these benefits. People are generally more active when they retire. That means more vacations, more dining out and more time visiting with grandkids. Those costs can add up, and Social Security can be very important in ensuring that retirement accounts are not depleted too early. Surviving your money is the most prominent financial risk in retirement, and a guaranteed additional income stream is great for minimizing that risk.
People who choose to receive smaller payments sooner may not miss out on income either. The average life expectancy in the US is about 79 years, so people should consider longevity in their retirement planning. Keep in mind that it takes several years to break even on cumulative Social Security benefits for people who defer in favor of bigger monthly checks. In fact, many people who delay Social Security until age 70 will reduce the total amount they receive from the program if they die before age 80.
Social Security is an important part of your financial plan in retirement. It is important to consider all your options, educate yourself about the possible results and make the best decision for your personal circumstances.
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