The decision on 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 starting to take them at age 70, but that's not always the best option. There's no right answer that applies to everyone, and every option comes with trade-offs. Still, there are plenty of people who should be taking Social Security much earlier than 70, and there's usually one major reason behind this.
Cumulative payments
In most cases, if a retiree is better off taking Social Security benefits earlier, it's due to cumulative payments. You'll max out your monthly check by waiting until 70, but there's a game of catch-up that takes a few years to play out.
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Consider a person who would receive $1,700 a month at full retirement age (FRA). The Social Security program creates an incentive to delay the receipt of benefits, and that monthly check would change, depending on the age that person starts to collect. The options would 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 because it's close to the current average benefit. Someone starting at FRA would have collected more than $60,000 from Social Security by age 70. If that person started at 62, it would yield the smallest possible monthly check, but that person would still amass more than $114,000 in cumulative Social Security benefits by age 70.
The break-even point in cumulative benefits is between the ages of 80 and 83 in these scenarios. If Social Security benefits were put into some high-yield savings instrument, the net break-even age could be pushed back even later.
This creates a classic "bird in hand" scenario. It's obviously great to max out your monthly Social Security income, but there are plenty of scenarios when it's better to have cash in hand right now.
When do cumulative benefits really matter?
With this trade-off in mind, each household has to determine exactly how it relates to their personal circumstances.
For example, consider healthy people with long life expectancies who can easily cover cash flow needs with retirement savings or a pension. They probably don't need to supplement cash flow with Social Security prior to 70. These retirees have the luxury to max out their expected income, and they'll have the largest guaranteed cash stream during later years. Doing so can also boost the survivor benefits their spouse might receive, especially if the spouse has no work history on which to claim retirement benefits.
Unfortunately, that's not applicable to most Americans. Social Security is really important for most households. Around 40% of people have no other source of retirement income. If you're relying on Social Security to meet cash flow needs, then you obviously don't have the luxury of delaying.
This could also apply to households that aren't fully reliant on these benefits. People tend to be more active early in retirement. That means more vacations, more dinners out, and more time visiting with grandkids. Those costs can add up, and Social Security can be really important to ensure that retirement accounts aren't depleted too early. Outliving your money is the most prominent financial risk in retirement, and a guaranteed supplemental income stream is great for minimizing that risk.
People who opt to receive smaller payments earlier on actually might not lose out on income, either. The average life expectancy in the U.S. is around 79, so people should take longevity into account for retirement planning. Remember that it takes several years to reach breakeven 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 decrease the total amount that they receive from the program if they die before 80.
Social Security is a major piece of your financial plan in retirement. It's important to consider all your options, educate yourself on the potential outcomes, and make the best decision for your personal circumstances.
