Social Security: Apparently, We’re All Doing It Wrong

A study was released last week that found that 96% of Americans choose the wrong time to start their Social Security benefits. With the option to begin guaranteed payments as early as 62, more retirees are electing this premature option than should, according to the study.  If someone elects to wait until age 70, for example, they would receive an annual benefit increase of 8% and that gain would be locked in as a guaranteed stream of income for the rest of their life.

The key takeaway from the study (that there is an optimal time for Social Security and most people do not choose it) is a worthy point to make, but I am always leery of financial decisions viewed in the aggregate.  This particular study looked at 2,000 households and ran over 1 billion scenarios to calculate the right time to make the Social Security decision.  The problem is that the math of retirement income is only part of the story when making these kinds of financial calls. It is a very personal decision that can have a lot of subjective factors, too.

Before we ever get to ideas about maximizing income here are a few ways to frame conversations around Social Security in your family:

  • Know what your income gap is and how best to fill it. Make sure you know what your expenses are in retirement before you think about drawing income. That way, if you do opt to delay Social Security you know how much you will have to draw from other savings to meet your expense needs.
  • Be mindful of how your other savings might be needed throughout the course of retirement. Social Security provides an income stream, but it does not provide lump sums that help with larger expenses like home improvements, car purchases, or the potential for larger health related bills at the end of life.  Be careful in spending down too much of your outside savings just for the purpose of maximizing Social Security.  There should be a balance between the right amount in savings and the right amount of income.
  • Consider the balance between other streams of income and Social Security. A couple with pensions, a single person with substantial retirement accounts, or a business owner who just sold the family business might be living similar lifestyles but their decisions about Social Security timing can be totally different because of how they will generate income in retirement.  Take the time to learn how income can be created from all of your assets and then approach the Social Security conversation from your unique position.

The reason people often lack confidence around their Social Security decisions is because of what they hear from friends or because of what they read in an article. I can’t count how many times I have heard, “my friend told me I need to do ______ for Social Security because that is what they did.” This is one of many financial decisions that you can’t make based on what someone else has done.  The exact right thing for your friend to do with their retirement income could be the exact wrong thing for you to do and the reasons are not always rooted in dollars and cents. If you feel ill-equipped to figure all of this out on your own, schedule an appointment with your local Social Security office and then meet with a Certified Financial PlannerÔ.  Our team takes a comprehensive view of your income AND expense situation, make sure someone does so for you. The financial industry does not do a great job of educating investors about these kinds of decisions, but if you do have a trusted advisor, he or she should make Social Security part of your meeting rhythm.