I think we’ve been looking at Social Security retirement benefits all wrong. In the long-running debate about when to take Social Security — as early as age 62 or as late as age 70 — the focus has been on timing your claim to get the most money, in total, out of the social safety net.
This is a circular argument that will never be fully decided until the Social Security recipient in question dies. So let’s shift the focus from the question “How do we get the most out of Social Security?” to “How do we get Social Security when we need it most?”
Simply put, you’re more likely to run out of money at the end of retirement than at the beginning.
Behavioral science explains why we are all so prone to preferring money today over tomorrow. It’s called “hyperbolic discounting,” and behavioral economists plead that we meaningfully overvalue money now, unfairly discounting money later.
But the risk of making less money in your early retirement years is dwarfed in comparison to the risks of longevity and inflation in the latter stages of retirement. And the probability you will outlive your money meaningfully decreases if you wait to take Social Security.
Let me show you through an example that, while hypothetical, is no doubt close to reality for many.
We’ll consider three couples, the Earlies, the Fullers and the Laters. Each couple:
- Retires with $1 million in tax-deferred retirement savings.
- Has an identical 50 percent equity, 50 percent fixed-income portfolio.
- Has a pretax retirement income need of $90,000 per year.
- Will supplement their Social Security income with the retirement savings necessary to fulfill their income needs.
- Includes one household member who will receive the maximum in Social Security benefits and one who will receive 50 percent of the maximum.
The only difference is that the Earlies retire and begin taking Social Security retirement benefits at 62, the Fullers at 67 and the Laters at 70.