Deciding when it's time to retire is one of the most important financial decisions you'll ever make. It not only marks an important step as you transition away from living on earned income -- it also involves irreversible decisions regarding your Social Security benefits. The chart explained below holds vital information that every retiree should consider before making a major commitment.
Cumulative benefits
Many people struggle with determining the best age at which to start taking Social Security benefits. The program provides at least 50% of income for roughly half of retired households (those aged 65 or older), so it's a cornerstone of financial planning. The timing decision is one of the most important and most stress-inducing decisions facing many seniors.
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People often think about their Social Security in terms of monthly or annual income, and people often devise plans to maximize their benefits. The desire to maximize income is fairly obvious, but there's another way to think about benefits that might not be so obvious. Consider the case for cumulative benefits.
One of the primary factors that determines your monthly Social Security check is the age at which you decide to start receiving benefits. You can elect to turn on that source of cash flow at any point after reaching age 62. If you delay your claim, your benefits will grow until hitting their peak at age 70.
For someone born in 1960 or later, the benefit they'll receive waiting until 70 will be about 77% larger than the one they'd get starting as soon as possible at 62. While that may seem like an easy choice, delaying also means giving up years of checks upfront. When considering the total amount of income received from your first check onward -- your cumulative benefits -- it will take some time for even a significantly larger monthly payout to make up for the missed years. That's a wrinkle that retirees don't always consider.
The chart below depicts cumulative Social Security income received for four different scenarios based on the age at which someone elects to start receiving benefits. For simplicity, this assumes that a person receives $1,000 per month once they've attained full retirement age (FRA), which is 67 years old in this case.
Chart by author.
Note the significant length of time that cumulative benefits are highest for the red line, which represents taking benefits as early as possible at age 62. Larger monthly checks for the other scenarios mean they do eventually close the gap, but the effect of the head start is meaningful. Someone taking benefits at FRA would still need over a decade to see their cumulative benefits overcome that five-year head start.
Similarly, delaying benefits until age 70 won't pay off in terms of cumulative payments until after age 80. It takes an additional two and a half years for the age 70 case to surpass taking benefits at FRA.
Put this information into practice
According to Social Security data, the life expectancy for someone who lives to age 62 is around 81 for males and 84 for females. This is important information to consider, but you must do so in the context of your individual circumstances.
Some people work well into their 60s or 70s, so it might not make sense to take benefits early. Other households have other sources of retirement cash flows, such as a well-funded 401(k) or a defined benefit pension plan, so they can rely on those accounts and wait to max out their benefits later on. Some people don't have the luxury of drawing income from other places, making Social Security their primary source of retirement income so they can't afford to delay. Healthy people who have a family history of longevity might need to plan for cash needs further into the future than the average person.
There's no universally optimal answer to determine the best age to start taking Social Security income. However, the chart above offers a helpful framework to make an informed decision based on your own personal goals and needs.
