When Should You Take Social Security?

May 09, 2014

A question that I get very frequently is “When is the best time to take my Social Security benefits?” The real answer can only be determined if we know a few minor details. So, if you know these things, we can make a precise calculation. Otherwise, we have to make an educated guess.

What are the data points you need to get a precise answer to the question? The first is the date of your death! If you know that, then we’re in business but I’m going to go out on a limb here and assume you don’t know the answer to that question and it makes all the other data points seem a bit inconsequential. If you don’t know that, how do you make the decision? Here’s how I go about helping people figure out the answer that is the best fit for their lives.

Get your Social Security estimates. You can either look at the statement that the Social Security Administration sends out periodically (no longer annually in a great budget cutting move) or go to www.ssa.gov and use the Retirement Estimator. I’ll use estimates from someone I talked to last week. At age 62, the monthly benefit would be $1,670/month. At 67, it’s $2,460 and at 70 it rises to $3,090.
Figure out your “breakeven ages.” What do I mean by that? If they start collecting benefits at age 62 rather than age 67, they will be reducing their benefit PERMANENTLY by $790/month. That reduction buys them 5 years of income or 60 months of $1,670. That’s $20,040/year for 5 years or $100,200 overall. You have to walk away from over $100k in income in order to get an additional $790/month. That means it takes you 127 months (excluding any interest you might earn) to recapture the $100,200 you walked away from to delay Social Security until age 67. That’s 10 years and 7 months. Add that to the age 67 start age, and you have to be almost 78 years old to recoup the money you walked away from. So, for this person, if they expect to live beyond age 78, it makes sense to wait until 67 rather than taking Social Security early. I did the same calculation with age 67 vs. 70 and the payback period is 141 months or 11 years and 9 months. So for her, that means living until almost 82 is when it makes sense to wait until age 70 rather than taking the benefit at age 67. These are very simplistic calculations and don’t factor in investment growth, inflation or other factors that might be important but it’s a great starting point.
Consider your other income streams and assets. If you have large 401k accounts, it might make sense to live off of the 401k and allow your Social Security benefits to grow. This makes sense if you have longevity in your family. You’d want Social Security to be as substantial as possible if you plan to blow out the candles on your 100^th birthday cake!
Consider your longevity, your health, your lifestyle, and your goals. Social Security can’t be passed down to your kids. Your 401k can. So, maybe if you have significant health issues and don’t realistically expect to see your 80’s, taking Social Security earlier allows your assets to last longer so that you leave more of your money to your heirs than by draining your accounts to grow Social Security.
The last factor is: Do you need the money? If taking Social Security the day you retire is the only way to make ends meet, by all means take it! It’s nice to talk in hypotheticals, but when we look at your real life, what are the right answers? Don’t be influenced by “experts” or friends or family members or what you see on TV or read on the Internet. Figure out what your retirement picture looks like well in advance of retirement. Understand your income streams, your assets and how much you can withdraw safely and absolutely understand your expenses. That will help you understand if you need the income.

The answer to the question “when is it best for me to take Social Security?” is not an easy one. But, if you walk through this process, you will have a much better handle on what makes sense for you. Then you can make a more informed and hopefully better decision.