Social Security Puzzle
Social Security is the foundation of most retirees’ financial plans. According to Pew Research, Social Security payments made up at least half of total personal income for 63% of retirees. Perhaps the biggest puzzle for retirees is when to begin Social Security payments. Retirees can turn on Social Security payments anywhere between 62 and 70. Of course, starting before your full retirement age (FRA) means you get a reduced payment for more years and starting after your FRA means getting an increased payment for less years.
How do you decide what is the best age to take your Social Security benefits? You just need to know one thing: when will you die. If you are married, it would help to know when your spouse will die as well. Since most of us don’t know when we or our spouse will die, we can look at statistics to help us decide. We know that if we take Social Security payments early, we will get a smaller amount over a longer time. And if we take Social Security payments later, we will get a larger amount over a shorter time. One way to decide is to determine the breakeven age. That is the age when waiting later to take your Social Security payment surpasses the amount you would have made by taking payments earlier.
I used this Break-Even Calculator which told me my breakeven age was when I turned 82. Knowing this I have to decide if I’m likely to live that long to make it worth waiting until 70 to begin taking Social Security payments. Lucky for us that the Social Security Administration (SSA) has a Life Expectancy Calculator that lets me know when the average male my age is expected to die. I’m happy to inform you that SSA thinks I will live to 85 1/2. But that is just averages. Half of my male counterparts will die before that, and half will live longer. Which half am I in? I went looking for a LIfe Expectancy Calculator that takes into account my personal characteristics and habits that should give me a better idea of how long I’m predicted to live. That calculator which required me to tell about my diet, weight, health, exercise habits, parental history, and other habits, predicts that I will live until around the age of 90. It seems a reasonable guess that I will live past the breakeven age of 82. Of course, there are no guarantees, I am well aware that the Bible tells us “Why, you do not even know what will happen tomorrow. What is your life? You are a mist that appears for a little while and then vanishes” (James 4:14, NIV).
But that isn’t the real reason we decided to wait until 70 to begin my Social Security payments. When you are married both retired spouses receive a separate Social Security payment. It is usually beneficial for the spouse who has the larger payment to delay receiving payments until 70. Because when one spouse dies, the other spouse gets to keep the larger of the two payments. When making the decision about when to begin Social Security payments, the spouse with the larger payment must also consider the life expectancy of his or her spouse. In our case, the SSA Life Expectancy Calculator tells us that the average woman my wife’s age will live to 87 1/2. The LIfe Expectancy Calculator that takes into account personal characteristics and habits predicts that Tammie will live to 95.
Based on this likelihood that we both have the possibility of living into our 90s we decided that Tammie would begin her Social Security payments as soon as she retired in December of 2022 even though that was a year before her FRA. I am waiting for my 70th birthday in November of 2025 to begin drawing my Social Security payment. We look at Social Security as old age protection. Having a safe inflation adjusted income stream is my way of protecting my wife when I’m no longer here.
This was the right decision for us in solving the Social Security Puzzle. But there are many reasons why you might take your Social Security payments earlier. Some people need the money as soon as they retire so waiting isn’t an option for them. If you are in poor health, it might make sense to take Social Security as soon as possible. If you are a couple and one has much higher earnings, it might make sense for the lower earning spouse to take their Social Security early.
One reason that I have heard others use that I don’t think is a good reason to take Social Security payments early is that the Social Security Trust Fund is scheduled to be depleted by 2034. If that happens, Social Security will only be able to pay about 80% of the promised Social Security amount for each retiree. I find it extremely hard to believe that politicians will force voting retirees to take a 20% pay cut. I would not make a financial decision on the basis of that fear. What I predict will happen a few years ahead of that situation is that taxes will be raised and the FRA will also be increased.
When to take Social Security payments is one of the biggest financial decisions most retirees make. If Tammie lives to 95 and I live to 90, we will likely receive over 1 3/4 million dollars from Social Security in our lifetimes. If you want to look into this topic further, listen to this video by Erin Talks Money.