Retirement Mistake #2: Taking Social Security Payments Too Early
OK, this one might get a little morbid. But when you consider when to start taking your Social Security payout, you need to ask yourself how long you realistically expect to live. And I’m not talking about doctor’s estimates in a Breaking Bad scenario. I’m talking about a taking a realistic look at your family health history.
To what age did your parents and grandparents make it? Does your family have a history of heart disease or cancer? How is your health today? Have you lived a healthy lifestyle over the course of your life? Do you smoke — or did you smoke for a long period of your life?
This matters because taking Social Security early makes all the sense in the world if you have a relatively short life expectancy. But if you think that you might live well into your 90s, it makes far more sense to hold out for the larger benefit.
Take a look at this table provided by the Social Security Administration: Effect of Early or Delayed Retirement. And let’s use a person born in 1960 as an example.
A person born in 1960 is eligible for full Social Security benefits at age 67. But if you were to hold out for three additional years, you would be eligible for benefits that are 24 percentage points higher.
Let’s play with the numbers. Let’s say you’re eligible for $50,000 in annual benefits at age 67. That would mean that by age 70, you would have already collected $150,000 in benefits over the preceding three years. However, if you waited until age 70, you would be eligible for $62,000 in annual benefits. Thus, you would have to collect the higher $62,000 benefits for 12.5 years to “break even,” not accounting for the time value of money or any tax effects, and you would be ahead for any time after that. (In case you want to see the math, it looks like basic high-school algebra: 150,000 + 50,000x = 62,000x, where x is the number of years it would take to break even.)
So, if you reasonably expect to live well into your 80s, it makes sense to wait. If your family health history suggests otherwise … take the money sooner.