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On the surface, it seems obvious that the best way to optimize retirement is to delay taking Social Security for as long as possible.
According to the Social Security Administration, taking benefits early (before age 62 for those born after 1960) can result in lower monthly payments. At age 67, you qualify for full benefits, but if you defer claiming until age 70, you can enjoy a 24% increase in total monthly benefits. At age 70, your monthly benefits stop increasing.
With this in mind, many financial planners recommend delaying benefits until you reach age 70 if possible. However, this relatively simple math ignores some key variables that may shock some retirement planners.
An article in the Journal of Financial Planning by an economics professor at Yale University and Pomona College states: “Age 70 is not the most financially rewarding age to initiate benefits unless an individual has a low discount rate and/or is confident that he or she will live a few years longer than life expectancy” (1). The discount rate is the expected average rate of return and represents the present value of all your future payments. It’s used to decide whether it’s worth waiting for Social Security.
They said their calculations “do not support the hypothesis that the vast majority of people who choose to start collecting Social Security retirement benefits before age 70 are making a mistake.”
That’s why some academics suggest that early retirement may be a better option for some people.
When recommending deferring benefits, academics and economists use simplistic and general assumptions that do not fully reflect the reality for most retirees. That’s according to Derek Tharp, a financial consultant and associate professor of finance at the University of Southern Maine.
In an article published by The Wall Street Journal, Tharp argued that this simple spreadsheet calculation assumes that “a dollar in the future is worth almost the same as a dollar today(2).” This assumption is based on another assumption: Retirees invest primarily in ultra-safe assets that provide little return after inflation.
By doing so, economists miss out on the opportunity cost, the reward for forgoing the choice.
“Most people’s portfolios do not contain assets that yield only 0% to 2%. Instead, their portfolios contain stocks and bonds – assets that historically have yielded close to 5% above the rate of inflation,” he wrote. “This difference is not a matter of trivial academic assumptions. Assuming your Social Security income is around 5%, rather than less than 2%, that could completely change the calculation; it would make delaying benefits much less attractive.”
Retirees who delay taking Social Security may also need to withdraw savings and investments to pay for living expenses, hurting their savings and future returns.
Another risk faced by those who delay benefits is death, Sapp said. According to the Centers for Disease Control (CDC), life expectancy is 78.4 years, but your personal lifespan may differ from this broad average. If you die young, you could be “leaving hundreds of thousands of dollars on the table that could otherwise be spent or given to loved ones or causes that people care about,” Tharp said.
To account for these risks, he recommends using a higher discount rate when calculating the present value of future benefits.
“Retirees with modest portfolios, health issues, or a tendency to underspend may see effective discount rates of 6%-8% or higher, which shifts decisions strongly toward filing earlier,” he writes in an article in Kitces (3). “Conversely, retirees with substantial resources and less vulnerable to policy or set of return risks may still benefit from delaying until age 70.”
If you need help determining when to collect Social Security, it may make sense to talk to a professional counselor. They can help you prioritize, plan for the future, and find the right schedule for your specific needs.
Research from Vanguard shows that working with a financial advisor can increase net returns by about 3% over time. If you start with a $50,000 portfolio, professional guidance could mean more than $1.3 million in additional growth over 30 years, depending on market conditions and your investment strategy.
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Through Advisor.com, you can schedule a free, no-obligation consultation to discuss your retirement goals and long-term financial plans.
Math aside, many retirees overlook lifestyle factors when making this critical decision.
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As Tharp suggests, using a higher discount rate can help capture all the financial risk you face when deciding when to start collecting Social Security benefits. But it doesn’t capture the lifestyle factors that are critical to this decision.
Not only is a dollar today worth more than tomorrow, it’s also more flexible. Your income may be more useful in your 60s than in your 80s, when your health and mobility may be limited. The average healthy life expectancy in the United States is only 63.9 years, according to the World Health Organization, so if you delay benefits until age 70, you could be missing out on some of your best retirement years.
These factors may be why the average retirement age in the United States is 62, according to MassMutual (4) and why only 10 percent of retirees wait until age 70 to collect benefits, according to a Bipartisan Policy Center analysis of SSA data (5).
If you’re worried about rising costs eating into your retirement savings once you no longer have income, you’ll need to find ways to cut back on expenses and take advantage of discounts when possible.
Organizations like AARP offer seniors discounts on just about everything—from prescription drugs and dental plans to travel, entertainment, and insurance.
As one of the most trusted organizations for seniors in America, AARP not only offers money-saving benefits but also helps you make smart financial and health decisions.
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Simple spreadsheet calculations cannot cover all the risks and nuances of your personal finances. Therefore, rather than delaying Social Security for as long as possible, better assumptions and a higher discount rate can be used to calculate the actual present value of the benefit’s future cash flows.
You’ll also want to make sure you have an emergency fund ready and a health care plan in place.
There are many high-yield accounts out there, but it pays to shop around and store your emergency funds with the company that offers the highest interest rate available. If they suddenly lower their rates, start shopping around again and make sure you move your money where they can earn the most interest.
SoFi offers high-yield accounts you may want to consider – no fees, no monthly maintenance fees, no minimum balance requirements.
You can also earn 4.30% APR on savings balances and 0.50% APR on checking balances via direct deposit or qualified deposits. New account holders can even earn up to $300 in cash bonuses when you set up direct deposit.
Deposits are insured up to $250,000 through SoFi Bank, with up to $2 million in additional coverage through the SoFi Deposit Insurance Program.
When you sit down to create a financially focused retirement plan, you also need to plan for your physical health after you no longer receive the benefits your job provides.
Without proper planning, paying for long-term care can quickly drain your retirement funds. In many cases, the burden of paying for care ultimately falls on family members, which can put a strain on their finances.
Instead of hoping your health lasts, you might consider long-term care insurance to help cover costs. It covers the cost of in-home assistance, nursing homes and assisted living facilities.
GoldenCare offers different options based on your needs, including hybrid life or annuity with long-term care benefits, short-term care, long-term care, home health care, assisted living and traditional long-term care insurance.
We rely only on vetted sources and reliable third-party reports. For more information, see our Editorial Ethics and Guidelines.
Financial Planning Magazine (1); Wall Street Journal (2); Kitty (3); MassMutual Retirement Happiness Study (4); Bipartisan Policy Center (5)
This article provides information only and should not be considered advice. It is provided without any warranty of any kind.