One of the toughest decisions early retirees face is when to start collecting Social Security. The Social Security Administration recommends waiting at least until full retirement age, which is 67 for most pre-retirees. However, you can claim early, at age 62, and receive about 70% of your full benefits. Delaying benefits past full retirement age increases your monthly payment by as much as 24%.
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Here’s how the figures look side-by-side, using a roughly average $2,000 Social Security monthly benefit and life expectancy of 83 years for a 55 year old:
| Age 62 | Age 67 | Age 70 | |
| Benefit Amount | $1,400 | $2,000 | $2,480 |
| No. of Years of Benefits | 21 | 16 | 13 years |
| Total Benefits Received | $352,800 | $384,000 | $386,880 |
If you wait until after age 62 to claim, it’ll take time to catch up to the total benefits you would have received if you’d started at age 62. Your break-even point is that age at which that happens.
Conventional wisdom says that for most people, it’s 78 to 81. However, that estimate is wildly inaccurate for many Americans, as Eric Amzalag, CFP®, RICP® and CEO of Peak Financial Planning, explained in a recent YouTube video.
The SSA’s recommendations don’t account for the effects of time on the value of money (inflation, for example) or the risk of dipping into your savings early in retirement, which Amzalag says is the most vulnerable time because one market correction could wipe out your retirement plan. The recommendations also ignore the returns your investments will earn if Social Security lets you minimize withdrawals.
All things considered, there’s a 95% chance that you’ll never break even.
This is likely news to you even if you’re working with a financial planner. That’s because planners typically assume a life expectancy of 95 years to ensure that you don’t run out of money. That strategy has benefits, but it’s risky because you have little chance of living that long.
“Would you still defer Social Security to 68 if you knew that this gamble or investment had a 33% chance of paying off?” Amzalag asked in an interview with Nifty 50+.
This disconnect doesn’t only affect how much money you wind up with in retirement. It also impacts how you spend it. A one-size-fits-all approach could lead you to delay retirement longer than you need to, or make you fearful of spending on activities you enjoy while you’re young and healthy enough to participate in them.
“I think consumers are made to feel bad for feeling like, ‘No, I want to claim earlier,’” Amzalag said. “They have this intuition that the money is worth more to them today than if they were to delay, and then they’re made to feel stupid as a result of having that intuition.”
So how do you know if you should claim Social Security early or hold off? Amzalag has devised a framework to help you figure it out..
- Calculate the cost of delayed benefits. “Money today is worth more than money in the future, and so you need to apply some kind of mathematical discount rate,” Amzalag said. You can use the annualized returns you expect from your investments. “Most people will be between 4% and 8%,” according to Amzalag.
- Estimate your life expectancy. Actuarial tables from the SSA show your life expectancy based on your age and gender. Consider how your family history and current health might change the estimates.
- Stress-test your bridge-years budget. “Look [at it] and say, ‘When am I going to retire, either by force or by choice, and then what options for income sources do I have for the years between when I retire and when I would like to claim Social Security?’” he advised.
Amzalag said most people will fall into one of three buckets:
- No retirement savings
- Pension but no savings
- Significant retirement assets
“If you’re in those first two buckets, you want to try to delay Social Security because you don’t have financial assets to use as a flexible fallback option,” according to Amzalag.
“If you fall in third stress-testing [bucket], which is, you’ve got $500,000 or a $1 million, and you could use those during your gap years, and the choice is, ‘Do I use those during the gap years, or do I let them grow and take Social Security to help reduce the strain on my portfolio?’ it can start to make more sense to do that.”
Please remember: all financial situations are different, so check with your own financial planner so you can talk about your specific situation
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