In retirement, you have options for collecting Social Security benefits. This can be a confusing or stressful decision that can have major ramifications, and there’s no going back once you’ve selected a path. Since there no universal rule exists to optimize retirement, the best option depends on a number of factors, including your birth year, how much you have paid into the system, other sources of income, and anticipated lifestyle and healthcare needs. Ultimately, the decision should be made in the context of an overall financial plan, and you should focus on ensuring your cash flow needs will be covered.
Seniors can start collecting Social Security retirement benefits at any point between the ages of 62 and 70. The full retirement age is currently 66 years and two months, but it is rising to 67 for people born after 1960, and it may continue to rise.
Delaying collection will increase the amount you receive. If you start collecting at 62, you will only receive 70% of your full benefit, whereas delaying payments to 70 will result in monthly distributions of 124% of your full retirement benefit. In 2021, the maximum monthly benefit for someone beginning payments at age 62 will be $2,324. The maximum for someone starting payments at 70 will be $3,895.
For reference, the average retiree is collecting just over $1,500 each month, but the age dynamics are the same regardless of benefit level.
The bonus for delaying Social Security payments is one of the trickiest factors in determining retirement age. Having cash now is a good thing, but having larger guaranteed monthly payments is also important.
From the standpoint of total aggregate income through average life expectancy, full retirement age is the best time to start taking benefits. People in the United States who reach 65 years of age have a life expectancy of approximately 82.5. This means that somebody taking the maximum monthly payout at age 62 would collect, on average, $571,704. That same person choosing to delay collection until age 70 would receive $584,250 through average life expectancy. Starting at 66 and two months tops both of those, leading to lifetime collections of $610,148.
The system is designed around life expectancy, so this should not be surprising. Unfortunately, the decision isn’t as simple as maximizing total benefits. While starting at 62 will reduce the amount you collect each month, that head start will take almost 16 years to overcome in terms of cumulative income if you wait until full retirement. Retirees need to focus on balancing monthly cash flows.
The major risks in retirement generally revolve around covering cash needs. Retirees may fall into lower tax brackets and no longer need income to pay off a mortgage, build savings, or support children. However, healthcare spending will likely rise, and freeing up 40 hours each week means that retirees deal with the clichéd “every day is a Saturday.” Inflation drives up the cost of living, and commonplace luxuries like cell phones and internet can cause basic lifestyle spending to rise.
Retirees should be realistic about these monthly or annual cash outflows, build in some wiggle room for uncertainty, and analyze their budget relative to sources of income. Many people have accumulated savings in retirement accounts or investment portfolios, and most planners believe that you can withdraw 3% of the total value of these accounts each year safely. Many people also have pensions or private annuities that will deliver guaranteed income in retirement. If a cash flow shortfall occurs in retirement, taking Social Security at 62 may be the only viable option. If the early years are fine, but you are concerned about healthcare expenses in your 80s, then it might make sense to delay as long as possible.
The right age to take Social Security benefits depends on many factors, and you should base the decision on cash needs in the context of an overall plan.
Ryan Downie is a consultant and former equity research analyst and financial planner with a BA in economics from Notre Dame.