If you're debating if you should take Social Security early or wait, you're not alone. Deciding when to take Social Security is the most important (and arguably the toughest question) that millions of baby boomers are struggling to answer.
Take Social Security too soon, and you could leave delayed retirement credits on the table that could be worth tens of thousands of dollars in lifetime Social Security income. Take it too late, and you risk not being able to enjoy the benefit of Social Security income if you get sick.
Although deciding when to take Social Security depends a lot on individual circumstances, here are two scenarios when waiting to start receiving your Social Security checks could be a mistake.
Here's to your health
The problem with statistics is that they can be very misleading, especially if you use them to help you determine when to start receiving Social Security.
Yes, the Social Security Administration reports that the average man born in 1960 can expect to live until about 83 years old and the average woman can expect to live to roughly 86 years old. But those are average life expediencies and that means that many people will pass away much sooner than that. For example, Vanguard estimates that a 65-year old man has a 41% chance of living to age 85 and that a 65-year-old woman has a 53% chance of living to age 85.
Unfortunately, there's no test or calculation that you can do to know specifically how long you'll live and that brings me to one of my favorite quotes of all time:
"Tell me where I'm going to die, so I won't go there." -- Charlie Munger, Berkshire Hathaway.
As Munger alludes to with his quote, there's just no telling when (or where) you'll die, and because of that, individuals should consider their health history, and the health history of their parents, carefully before deciding to wait until later in life to take Social Security benefits.
If you don't like your odds of living to (or beyond) the averages, then taking Social Security early can be the best bet, even though it results in a smaller monthly check.
As a refresher, a person born in 1960 who takes Social Security at age 62 will receive 30% less than they would receive in Social Security income at full retirement age, which is 67. Waiting until age 70 boosts that payout to 124% of the amount that they would receive at age 67.
Let's consider how this might play out for Mary, a single retiree who was born in 1960.
Assuming Mary's Social Security income at full retirement age would be $1,000, claiming at age 62 results in her receiving $700 per month in Social Security wages. If she were to pass away at age 75, or 13 years later, then she will have collected (not including annual cost of living increases) about $109,000 in Social Security income.
If she waits until 67 to collect Social Security, and therefore, receives 100% of her $1,000 per month Social Security check until she passes away at age 75, she will have received $96,000 in Social Security income over her lifetime.
Finally, if she delays taking Social Security until age 70 so that she gets the highest payout, she'll receive $1,240 per month. If she passes away at age 75, she will have collected only $74,000 from Social Security in her lifetime.
Always plan ahead
It could also be a mistake to delay taking Social Security if you have other sources of retirement income and are therefore able to invest your after-tax Social Security income, rather than use it to pay your day-to-day expenses.
Unlike traditional IRAs, Roth IRAs don't require minimum distributions at any age, so investors can contribute after-tax earned income to them every year until death.
Investing Social Security income in a Roth IRA could be an excellent decision, because after-tax contributions can grow tax-free. Roth IRA contributions can also be tapped at any point to pay unforeseen expenses, such as medical costs, and earnings on contributions can be taken out tax-free after a Roth IRA has been established for at least five years.
If money doesn't need to be withdrawn from a Roth IRA, then taking Social Security early and contributing that income to a Roth IRA can result in significantly more money for heirs than waiting until age 70.
For example, if Mary takes Social Security at 62 and then invests her $700 every month, and she earns an average return of 6% per year, then she'll have an additional $394,769 at age 85. However, if she waits until age 70 to begin collecting Social Security, and then she contributes her entire $1,240 per month to that same investment, then her account would grow to only $346,348. Therefore waiting to get the higher monthly payment to invest could actually result in an investment account that's worth considerably less money.
Tying it together
Picking the time to start receiving Social Security checks is a personal decision and these scenarios may not make sense in your particular situation. However, if health is a concern, or you're able to invest any Social Security income you receive, then claiming Social Security at 62 may end up being a better choice than waiting until age 70.