When is the best time to take Social Security?

Most people make the wrong decisions about when to claim their Social Security retirement benefits. One of the most important decisions in retirement is when to start claiming Social Security. Unfortunately, almost all Americans start taking the benefits at the wrong time, losing out on about $111,000 per household. 

Only 4% of retirees start claiming their Social Security benefits at the most financially optimal time, according to a 2019 study from United Income, an online investment management and financial planning firm. That means the remaining 96% of retirees are losing out on a collective $3.4 trillion in potential retirement income. 

So when you should take Social Security? You can look at it as a purely financial decision or as a personal decision.

Let’s discuss a purely financial decision:

Should I retire at 62, 67 or 70?

The earliest age at which most people can take Social Security retirement benefits is typically 62, but those payments are normally reduced because people usually aren’t entitled to 100% of their benefits until 67. People who wait until 70 to retire can receive 124% of their benefits.

Important Social Security rules to remember at age 62, 67 and 70:

The earliest you can start taking Social Security retirement benefits is 62. However, the Social Security Administration reduces benefits by 30% for people who retire at 62, meaning they receive just 70% of their full retirement benefit each month for life.

For people born in 1960 or later, full retirement age is 67. This is the age at which you are entitled to 100% of your Social Security retirement benefit.

The Social Security Administration pays people to delay taking retirement benefits. After age 67, you can receive an 8% bump in your benefits for each year you wait. If you wait until age 70, you can get 124% of your retirement benefit. You do not get additional bumps after age 70.

Case Study:

Here is an example of a 62 year old woman I’ll call Jenny who was a high earner and maxed out her social security while she was working. Below is Jenny’s monthly income based on when she decides to take Social Security:

Age Monthly Social Security

62 $2,706

67 (Full Retirement ) $3,844

70 (Delayed) $4,766

From a purely financial perspective it makes sense for Jenny to delay taking Social Security until 70.

Now let’s look at some personal reasons why you may want to take Social Security early.

You need the money now.

Although you realize that you will get a reduced amount for the rest of your life, you need the money now. Keep in mind that another strategy is to get a part time job. This will be easier to do when you’re 62 than when you’re 70 and may need more monthly income.

You don’t think you’re going to live to collect years of  Social Security.

You may have health issues and would prefer the money earlier. But anyone who lives past average life expectancy is going to receive more in lifetime benefits by waiting to claim the benefits than by claiming earlier.

You think you can do better investing the money than having it grow by 8%.

It’s hard to beat a guaranteed 8% return but some people are willing to risk it.

You don’t think Social Security will be around when you need it.

Some Americans may believe that if the Social Security trust funds were depleted, Social Security would be unable to pay benefits at all. However, in 2035, the first year of projected depletion of the combined Social Security trust funds, the program is projected to have enough tax revenues to pay about 80% of scheduled benefits; that percentage would decline to 74% by the end of the 75 year projection period in 2096. The trust funds would be insolvent upon depletion, but because they would be unable to cover 100% of expenditures with incoming tax revenues, they would not be completely broke and unable to pay any benefits. However, according to the Congressional Research Service, not paying Social Security benefits to retirees that they paid into during their working lives would be political suicide to members of Congress.

The bottom line:

If you have a choice and are in good health, think seriously about waiting as long as you can to take your benefits (but no later than age 70). A long retirement coupled with uncertainty about markets and inflation are the biggest risks. Delaying Social Security, if you can, is effectively an insurance policy against those challenges. As people age, their other assets and income sources tend to be reduced or lose purchasing power to inflation. Social Security is guaranteed for life and inflation-indexed.

NOT FINANCIAL ADVICE

The information contained in this article is for informational purposes only and shall not be understood or construed as financial advice. I am not an attorney, accountant, or financial advisor, nor am I holding myself out to be. I do not accept any fees or commissions from anyone or any financial institution. 

I’d love any feedback on these articles.