If you want to determine the optimal time to start collecting Social Security benefits, it's simple. Just hop in your Delorean, travel 30 years into the future, go check on yourself without disrupting the space-time continuum, and then come back and report your findings.
The fact is optimizing Social Security without complete knowledge of how long you'll live, what your expenses will be, and how your personal retirement savings portfolio will perform is impossible. But your best bet is to delay collecting Social Security benefits as long as you can possibly afford to do so.
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The benefit of delaying Social Security payments
Retirees become eligible for Social Security benefits as early as age 62, but collecting that early means you'll be taking a smaller monthly payment in exchange. For each month before your full retirement age, your monthly payment is permanently reduced by 5/9 of 1% up to 36 months and 5/12 of 1% for each additional month.
On the flip side, delaying Social Security benefits beyond full retirement age boosts your payment 8% per year, but retirees won't receive any additional credit beyond age 70. That's a stellar guaranteed return just for waiting a few years.
Someone born in 1960 turns 62 next year. Even though their full retirement age is 67, they could start taking Social Security payments, but they'd receive just 70% of their full-retirement-age benefit. If they wait until they turn 70, they'll receive 124% of their full retirement benefit. That person only has to live until age 81 to make the delayed Social Security benefit better than taking it early. If they live until 85, it'll be the best possible choice out of all options.
The simple reason you should delay if you can
You can't know how long you're going to live. If you make it past age 85, you win the bet for delaying Social Security until age 70; if you pass away earlier, then it turns out you made a suboptimal decision.
But it's a lopsided bet. The downside of being wrong by delaying Social Security isn't so bad, but the downside of being wrong by taking it early can be tragic.
If you have enough retirement savings on your own to live comfortably in your 60s, then you don't really need that extra money from Social Security. You can live the retirement you want, and if it happens to end earlier than planned, you still got to live it your way.
But if you live well past 85 into your 90s, it's much more likely you'll really need that maximum Social Security payment. Most retirement planning is based on a 30-year retirement. Your savings may not last into your 90s on their own. Additionally, you may need more medical care or at-home assistance at that age, which is extremely expensive.
A bigger Social Security check every month will go a long way toward covering the expense of a long retirement. It helps ease the financial burden, so it doesn't fall on your children. Or it simply means there's more to leave to your heirs when you do pass away.
Delaying Social Security benefits is a simple hedge against living a long life. Considering you can only live to regret taking Social Security too early, it's a very good hedge to take if you can afford it.
