When we think about life expectancy, we usually consider it from birth, not from our current age, and that could be a costly mistake, because life expectancy factors heavily into our decision of when to claim Social Security benefits.
According to a recent survey by The American College New York Life Center for Retirement Income, about 47% of respondents over age 60 underestimated how many more years a typical 65-year old man could expect to live, and only 41% guessed correctly that he could expect to live an additional 20 years.
Failing to accurately predict life expectancy could result in claiming Social Security benefits earlier than necessary, leaving tens of thousands of dollars in lifetime Social Security benefits on the table. Read on to learn more about the relationship between life expectancy and Social Security income.
Life expectancy is higher than you think, and it's growing
In the past 100 years, innovation in food supply and health has added more years to life expectancy than all the previous years of human existence, and average life expectancy is growing by three months annually.
The average life expectancy from birth was about 50 years in 1900, and in the United States, it's nearly 79 years today. The average American born in 2015 is expected to live a full two years longer than someone born in 2000, and ongoing advances, including the merger of technology and health, have futurists predicting that life expectancy will increase even more quickly in the coming years.
For example, Alphabet's futurist Ray Kurzwell thinks that in the 2030s we'll begin adding one year of life expectancy annually thanks to advances in healthcare, such as correcting cancer-causing errors in our genetic code.
As a result, the average life expectancy of someone who has already made it into their 60s is expected to climb in the coming years. Currently, Social Security reports that a man and a woman turning age 65 today can expect to live, on average, until age 84 and 87, respectively. Importantly, many of us will live even longer than that. Roughly 1 in 4 65-year-olds will make it to 90 and 1 in 10 people will live beyond age 95.
Advances in healthcare have big implications for life expectancy in the future. The oldest old, or those aged 85 and up, constitute 10% of the age 65-plus population in developed countries. Globally, this group of people is expected to increase by 151% between 2005 and 2030, which is significantly greater than the 21% increase expected for people under age 65. It also shouldn't be ignored that the estimated number of people over age 100 has doubled each decade since 1950, or that the number of centenarians is forecast to more than quintuple between 2005 and 2030.
Life expectancy's impact on Social Security decisions
Social Security is designed to pay out the same amount in total lifetime benefits, regardless of when you claim.
You can claim benefits at any point after reaching age 62, however, you'll only receive 100% of our benefit if you claim at your full retirement age (FRA), which ranges between age 66 to age 67, depending on birth year. Claim earlier than that age, and your payment is reduced by a fixed amount for every month you claim early. Claim after your FRA and your benefit is increased by the equivalent of 8% annually for every year you delay, up until age 70.
For example, a person with a FRA of 67 would receive 70% of their full retirement benefit if they claim at age 62, or 124% of their benefit if they claim benefits at age 70.
Because of delayed retirement credits, and the fact that Social Security bases its calculations on average life expectancy, people who live longer than average can come out ahead of others in terms of lifetime Social Security benefits if they wait to claim their benefits.
Yet most people assume they won't live longer than average. According to the American College New York Life Center for Retirement Income survey, roughly 34% of respondents think they'll die before age 85 (the average life expectancy for a 65-year-old man), and perhaps because of that pessimism, nearly 40% say they plan on claiming their benefits before turning age 65.
Additionally, over 25% of respondents think they'll eclipse age 90, yet only 12% plan on delaying Social Security until 70 to guarantee the larger benefit payout.
Undeniably, there are plenty of good reasons to claim benefits early, but the assumption appears to be that even if you're going to live a long life, your best option is to claim Social Security as soon as you can. Financially speaking, that's not the case.
Let's consider a hypothetical retiree who expects to live until age 90. If his full retirement age is 67 and his full benefit is $1,000 per month, he'll collect $700 per month if he claims at 62 or $1,240 if he claims at age 70. Over his lifetime, he'd collect $243,600, $288,000, or $312,480 in total lifetime Social Security benefits if he claims at age 62, 67, or 70, respectively.
As you can see, underestimating your longevity, claiming benefits early, and living longer than average can be a costly mistake. Therefore, while life expectancy shouldn't be your only consideration when deciding when to claim, it's important to carefully consider it before deciding when to begin receiving your Social Security benefits.