Asking an uncomfortable question can help you create your most comfortable retirement.
You can claim Social Security anytime between your 62nd and 70th birthdays. That’s a span of eight years or about 2,900 days. Picking the right day or month to apply for your retirement benefit within that lengthy window can be overwhelming.
Fortunately, there’s one factor that should carry the most weight in your Social Security timing decision. It’s a bit morbid, but here’s the question to ask yourself: How long do you expect to live?
How your lifespan affects your Social Security
When you claim Social Security earlier, you get a lower benefit but income upfront. When you claim Social Security later, you skip the early years of your benefit for higher income later. You can quantify the trade-off of postponing Social Security by calculating your break-even age.
Break-even age is when the higher benefit you get from delaying Social Security offsets the upfront income you didn’t receive.
Here’s a simplified example. Say you could collect Social Security today at age 62 and receive $1,050 monthly. Or, you could wait until you are 67 for a monthly benefit of $1,500. Choose to wait, and you’ll forgo $63,000 in income — that’s five years’ worth of the $1,050 monthly benefit.
To find your break-even age, divide $63,000 by the benefit increase associated with waiting. In our example, that’s $450. The answer is the number of months it takes for the higher benefit to “pay for” the income you skipped. In this case, it’s 140 months or nearly 12 years. Add 12 to the claiming age of 67, and your break-even age is about 79.
Lifespan puts your break-even age into context. If you are in poor health and possibly won’t celebrate your 79th birthday, delaying your Social Security until 67 probably leaves you with a lower cumulative benefit. On the other hand, if you come from a long line of centenarians, you stand to earn far more from Social Security by waiting.
How your lifespan affects your savings
Your savings balance is another factor to consider in your Social Security timing decision. You don’t want to be solely reliant on your Social Security income in retirement, after all.
The big question is, how do you know when you have enough money to retire?
Generally, you can assume your retirement account will last 30 years or more if you withdraw 4% annually, plus adjustments for inflation. This is known as the 4% rule, and it applies if you are at least 50% invested in stock.
That 30-year timeline puts you into your 90s, assuming you retire in your 60s. Again, your estimated lifespan adds important context. If you don’t expect to live to 90, you might take your chances with a slightly higher withdrawal rate. Just know that the longevity of your savings hinges on unpredictable factors, including future inflation and the future health of the financial markets.
Here’s what it comes down to:
- Ideally, you can live comfortably off 4% of your savings plus Social Security. You could then claim your retirement benefit and enjoy the money whenever it feels right.
- If your savings plus Social Security aren’t sufficient, but you expect to live for decades, postponing your retirement benefit makes sense.
- If your savings plus Social Security aren’t sufficient and you expect a shorter lifespan, downsizing could be your best option. Slash your living expenses, claim Social Security, and celebrate your retirement.
How to estimate your lifespan
So, how do you estimate your longevity? The usual process is to look first at the average life expectancy for your age, gender, and race. Then, adjust the average based on your health, family health history, and lifestyle.
There are many free life expectancy calculators online that walk through this analysis. As a rule, don’t provide any personally identifiable information to these programs. You’ll share information about yourself to get a life expectancy number, but the calculator doesn’t need your birthdate, mother’s maiden name, or Social Security number.
Claim Social Security on your timeline
Although lifespan estimates aren’t an exact science, they do provide useful context for financial planning. That context is particularly relevant to your Social Security timing strategy. You can and should run a break-even analysis on claiming now vs. later — but your break-even age is more meaningful when you compare it to your longevity.
It also helps to know the income your savings will provide to determine if you need to delay claiming for a higher benefit later. And the income available from your savings is also somewhat dependent on how long you’ll live.
So, ask the morbid question. Yes, it’s depressing to consider your end of days, but think of it this way: You’re simply collecting a data point that helps you make the most of your senior years.
— Catherine Brock
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Source: The Motley Fool