The Biggest Social Security Mistake You Can Make

The decision to retire early at age 62 vs. age 65, 66 or even waiting until age 70 isn't a straightforward math equation. And it can't be made in a vacuum.

(Image credit: themacx)

The biggest Social Security mistake isn’t taking it too early.

And taking it too late isn’t it, either.

It’s failing to build a multidimensional plan.

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Regular or decaf? Paper or plastic? Take Social Security at age 62 or 70? Some decisions in life are easier than others. Deciding when to take Social Security benefits is one of the most written-about financial topics. Yet, much of the advice is wrong. This is because Social Security discussions tend to focus on maximizing your benefit or hitting a break-even point in terms of “getting the most out of the system.”

The Cost of Trying to ‘Beat the System’

Individuals can file for Social Security retirement benefits as early as age 62 (and receive a reduced benefit) or wait and receive a bigger benefit. By age 70, the maximum benefit is reached, approximately 75% greater than the early benefit at age 62.

It’s easy to do the math to determine the break-even point, the age at which total Social Security income received from starting benefits at two different ages is the same.

For example, if your full retirement age is 66, then at age 70 your benefit is about 75% larger than your early benefit if you started taking payments at age 62. Thus, if your early benefit were $1,000, your maximum benefit would be approximately $1,750. To receive the higher amount though, you’d essentially have to give up 96 monthly checks, from age 62 to 70, totaling $96,000. Divide that number by the extra $750 at age 70 and you end up with 128 monthly checks needed to receive the same amount you would have received had you filed at age 62. That gives you a break-even time period of just over 10 years (128/12) at age 80. In other words, at age 80, you’ll have made up for the lost checks and thus be “beating the system.”

But, bigger isn’t always better.

The problem with this is that you’re looking at Social Security in a vacuum. Remember, the average retirement age in the United States is around age 63, according to the U.S. Census Bureau. If you retire prior to age 70 and delay your benefit, how are you going to make up for this lost income during those years? The answer is likely that you’ll spend down your savings at a faster rate, possibly cutting harder into your principal.

Delaying Social Security benefits, therefore, could mean severely depleting one of your primary sources of income in retirement.

What if there is a market crash during this time? Or, what if you needed to return your accounts back to their previous values? It could take until your mid-80s for your investments to recover, assuming low-volatility markets. But, when are the markets ever consistent or smooth for long periods of time? Any excessive volatility could extend the recovery period. Thus, from at age 62 to your mid-80s and beyond, so you could be taking a 25-year gamble — just to break even on Social Security.

Maximize Your Income and Flexibility with a Multidimensional Plan

Delaying Social Security makes most sense for those who are healthy, still working and looking to replace as much of their earned income as possible. I completely agree with delaying in these situations, as most retirees need as much net income as they did while they were working. A bigger benefit can help to achieve that. There are also ancillary benefits to this strategy, including a greater survivor benefit to a spouse.

Also, some people can lower their taxes in retirement by delaying Social Security and tapping their retirement accounts instead. That would shrink their required minimum distributions, and thus their tax bill. But, that’s in the rare instance when the amount in taxes you can save in your later years outweighs the taxes you’ll pay beforehand. So, this strategy should be considered only with the help of a financial adviser and/or tax professional.

However, you need to look at your entire financial picture, as each source of income has its advantages. Take your personal savings, for example. You have more control and flexibility over your savings than Social Security. With your savings, if you need more or less income, you have the ability to adjust. Once taken, there’s no voluntary adjusting the size of your Social Security benefit.

Additionally, other than a spousal or survivor benefit, you can’t name beneficiaries on your Social Security benefit or leave a legacy. With any investment account, you can pass it on to a spouse, other family members, friends or charities.

The goal is to best utilize the advantages of each income source in a fashion that helps maximize your income to achieve your financial goals and maximize your flexibility in the event you hit any bumps down the road.

You Are Unique, So Your Plan Needs to Be Unique, Too

Instead of thinking you need to automatically take Social Security at age 62, full retirement age or age 70, see how every asset, liability and income source works together in a detailed financial plan. Social Security will never replace all of your income. So, you need to also consider what you can get from other sources, including retirement savings, pensions and/or part-time work.

Before you set your heart on a specific retirement date, use a detailed retirement software program or work with a professional adviser to create and thoroughly test multiple strategies. You will likely find that the best age to start taking Social Security is wholly unique to you.


This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Sean McDonnell, CFP®
Financial Adviser, Advance Capital Management

Sean McDonnell, CFP®, is a financial adviser at Advance Capital Management, an independent registered investment adviser based in Southfield, Mich. He works closely with clients to create and implement customized financial plans, as well as provides a wide range of services, including: investment and 401(k) management, retirement planning and tax strategies.