Terry Savage: When to take Social Security

You may have seen videos making the rounds on TikTok or other social media. Or even a recent op-ed in the Wall Street Journal. All suggest that you grab your Social Security benefits at age 62 to "get that money while the getting is good."

In fact, they suggest you could come out ahead simply by investing those early benefits if you don't need them for living expenses.

However, that would likely be the worst mistake for your retirement planning and your retirement lifestyle.

Social Security is not a bet on the "averages" or a calculation of the "break-even" point beyond which you'd have to live to make up the difference between taking benefits early vs. waiting to get your largest check at age 70.

The compelling reason to wait until age 70 is the very real possibility you will live longer than average. In that event, you'll want the largest inflation-adjusted monthly benefit, coming at the very moment your other savings are running out!

Currently, only about 10% of workers delay taking benefits until age 70. Roughly 30% take benefits as soon as they are eligible at age 62. For many this is a simple matter of necessity. But for those who can afford to consider the long-term trade-offs, reacting to current fears of Social Security "running out of money" could be costly.

For a moment, suspend your current emotional reactions and hear the words of economist and Social Security expert Larry Kotlikoff: "Delaying Social Security benefits almost always makes sense."

Consider these facts in Kotlikoff's latest Substack post.

Waiting until age 70 to collect your retirement benefits results in a 76% higher benefit, adjusted for inflation, each month over collecting at age 62.

If you wait to take your largest benefit, after you die, your surviving spouse (and ex-spouse, if you were married to that person for at least 10 years) will collect the larger of your benefit or theirs.

It's a demographic fact that the fastest-growing cohort of our citizenry is the group over age 85. Healthcare advances have impacted longevity. Now, the leading edge of the baby boomer generation will swell that elderly population. You could be one of them.

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Investing your benefits?

What about that tempting argument that you should take benefits early, even if you don't need the income, because you can earn more by investing the cash? With the stock market at all-time highs, people have forgotten that bear markets can wipe out half of your money in just a few months. Do you want to risk giving up a guaranteed, inflation-indexed higher monthly income to make a bit more money (or lose a lot) in the stock market?

Or, as Kotlikoff explains from a mathematical perspective, stocks do generate a greater long-term real rate of return (after inflation) than safe inflation-adjusted government bonds (TIPS). That's because stocks are inherently riskier than a guaranteed inflation-adjusted return!

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Give up your insurance?

As Kotlikoff explains, Social Security is your longevity insurance against the risk of running out of money. We all buy insurance of some sort and never complain when we don't get to use it.

Says Kotlikoff: "Giving up lower benefits for, say, eight years to (receive) 76% higher real benefits for the rest of your days, i.e., purchasing longevity insurance from a trusted insurance agent, namely Uncle Sam, helps avoid a longevity catastrophe."

Would you stop buying homeowners insurance at age 62 because you've decided to gamble that your house won't burn down? It would save money, for sure — but it won't bring peace of mind. If your house burns down — or you live to your 90s — you'll need that insurance.

Kotlikoff says the financial services industry and the government have an incentive to get people to take their benefits now. Doing so hands Wall Street more of your retirement money, assets they offer "manage" and charge fees. He also notes that on an actuarial basis, the government saves money if you collect early.

The proof, he says, comes from the fact that the Social Security website (and most financial services firms' planning tools) have extensive references to average life expectancy, but no mention whatsoever of these four words: maximum age of life.

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Running out of money?

The most compelling argument these days for taking benefits early is the fear that Social Security will "run out of money" in less than a decade. Kotlikoff's response: "It would require a vote of Congress to cut benefits, and I don't believe politicians are suicidal. ... With 77 million people collecting benefits, almost all of whom are voters, I think there may be adjustments in payroll tax collections or even taxation of benefits. Even so, the majority of beneficiaries will still be far better off waiting."

Finally, there is the understandable temptation based on the news every day to just take the money, live for today and spend it now because you never know how ugly the future will become. Well, pessimists said that during the pandemic when the Dow Jones Industrial Average plunged to 18,213. How did that work out?

It never pays to bet against America — or yourself. And that's the Savage Truth.

— Terry Savage is a registered investment adviser and the author of four best-selling books, including "The Savage Truth on Money." Terry responds to questions on her blog at TerrySavage.com.