On paper, it seems rather obvious that the best way to optimize your retirement is to delay claiming Social Security for as long as possible.
According to the Social Security Administration, taking your benefits as early as possible (age 62 for those born after 1960) could result in lower monthly payments. At age 67, you qualify for full benefits, but if you delay your claim until age 70 you could enjoy a 24% total boost to monthly benefits. At 70 your monthly benefit stops increasing.
With this in mind, many financial planners recommend delaying benefit claims for as long as possible until 70. However, this relatively simple math overlooks some key variables that could shock some retirement planners.
“Age 70 is not the most financially rewarding age to initiate benefits unless an individual has a low discount rate and/or is confident they will live several years past their life expectancy,” says an article published in the Journal of Financial Planning by two financial experts. [1] The discount rate is the expected average rate of return that tells us the present value of future payments. It is used to decide if it’s worthwhile to wait for Social Security.
They said their calculations “do not support the presumption that the vast majority of people who choose to start their Social Security retirement benefits before age 70 are making a mistake.”
Here’s the updated math some academics are using to suggest an earlier retirement could be a better option for some.
While recommending delayed benefits, academics and economists use simple and generalized assumptions that do not fully reflect the reality of most retirees. That’s according to Derek Tharp — a financial advisor and associate professor of finance at the University of Southern Maine.
In an article published in The Wall Street Journal, Tharp argues that this simple spreadsheet calculation assumes that “future dollars are worth almost the same as today’s dollars” [2]. This assumption is based on another assumption: that a retiree invests mostly in ultra-safe assets that earn little to no returns after inflation.
By doing so, economists have missed opportunity cost, which is the returns of the forgone option.
“Most people don’t have portfolios consisting of assets that earn just 0% to 2%. Rather, their portfolios hold a mix of stocks and bonds — which historically have earned closer to 5% above inflation,” he wrote. “This difference isn’t a matter of trivial academic assumptions. Assuming you’ll earn about 5% rather than less than 2% on Social Security income can completely change the math; it makes delaying benefits much less attractive.”
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Retirees who wait to claim Social Security may also need to draw down their savings and investments to meet living expenses, harming their nest egg and future returns.
Another risk for benefit delayers is mortality, according to Tharp. Life expectancy is 78.4 years, according to the Center for Disease Control (CDC), but your individual lifespan could be different from this broad average. If you die early, you could be “leaving hundreds of thousands of dollars on that table that otherwise could have been spent or given to loved ones or causes one cares about,” says Tharp.
To account for these risks, he recommends using a higher discount rate while calculating the present value of future benefits.
“Retirees with modest portfolios, health concerns, or a propensity to underspend may see effective discount rates of 6%-8% or more, which shifts the decision strongly towards early filing,” he writes in an article for Kitces [3]. “Conversely, retirees with substantial resources who are less vulnerable to policy or sequence of returns risks may still benefit from delaying until age 70.”
Besides the math, there are also lifestyle factors that many retirees overlook while making this crucial decision.
Using a higher discount rate, like Tharp suggests, could help you capture all the financial risks you face while deciding when to start claiming Social Security benefits. But it doesn’t capture the lifestyle factors that are crucial for this decision.
Not only is a dollar worth more today than tomorrow, it’s also more flexible. Income in your 60s is a lot more useful than in your 80s, when your health and mobility might be restricted. The average healthy life expectancy in the U.S. is just 63.9 years, according to the World Health Organization, so there is a chance you’ve lost some of the best years of your retirement if you delay benefits until 70.
These factors could be why the average retirement age in the U.S. is 62, according to MassMutual [4], and why only 10% of retirees wait until 70 to claim benefits, according to the Bipartisan Policy Center analysis of SSA data [5].
A simple spreadsheet calculation doesn’t capture all the risks and nuances of your personal finances. Instead of delaying Social Security for as long as possible, use better assumptions and a higher discount rate to figure out the real present value of future cash flows from benefits. Also, consider working with a professional financial planner to customize your retirement plan and optimize decisions for your desired lifestyle.
We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines.
Journal of Financial Planning (1); The Wall Street Journal (2); Kitces (3); MassMutual Retirement Happiness Study (4); Bipartisan Policy Center (5)
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
