When Should You Take Social Security?

Mark Riepe: Welcome to Financial Decoder, an original podcast from Charles Schwab. On this show we take a look at the cognitive and emotional biases that can have a big impact on your financial life.

I’m your host, Mark Riepe, and together we’ll decode some of the biases that influence specific financial decisions we all face. And we’ll also examine strategies designed to help you avoid biases and improve your decision making.

If you’re like me, the first time you thought about Social Security was when you got your first real paycheck. I remember being surprised at how much lower my salary was than I had anticipated. When I scanned down at what was withheld, my first thought was “Who’s FICA and why are they taking my money?” 

I really didn’t think about Social Security again until about 20 years ago, when my mother wanted to talk about when she should take it.

But as we get closer to retirement, Social Security can stir up a whirlwind of questions.

It’s a complex issue with many decision points—and one of the biggest is when to start taking it. There’s no single correct answer, but today we’ll shine a light on the biases that can cloud the process. We’ll also offer ideas to help you formulate the decision that’s right for you.

It’s common for people to take Social Security at the earliest possible age—which is 62 for most people—and there are many good reasons for that.

For example, if your health is below average, or if you have a higher earning spouse who can delay claiming, or if you need that Social Security check to help cover your basic living expenses because of a change in circumstances, like if you are terminated from your job, or you quit work to care for a loved one. 

But what if you have more flexibility when it comes to timing and sources of income?

This is one of those key decision points—if you start taking Social Security at age 62, your benefits are cut significantly. For example, if you were born before 1959, that reduction is going to be about 30 percent.¹

Social Security bases the payout on calculations that estimate how long recipients are likely to live, and how long they’ll receive checks. If you start taking it early, your checks will be smaller because you’re collecting those checks for, potentially, a longer period of time.

And this decrease in your check is forever, no matter how long you live. If your spouse claims against your Social Security, then your spouse’s check is also decreased forever.

There are many biases² that contribute to the desire to claim right away, but I want to focus on three of them: loss aversion, present bias and reference points.

Let’s start with loss aversion. It’s a simple concept—people don’t like losses.

If you’re like most people, a $1,000 loss hurts about twice as much as the positive feeling you would experience from a $1,000 gain.³

So how does that work in the context of your Social Security decision?

Even though you know you’ll be rewarded if you choose to wait, in the moment it can feel like a loss, because you could be getting a check—but you aren’t.

Loss aversion can be especially harmful when combined with “present bias,” which is the tendency we all have to far prefer a reward today versus waiting for one tomorrow.

Social Security is essentially an annuity, and that means that you’ll receive payments for the rest of your life, no matter how long you live, and if you delay, every payment will be larger.

Present bias causes people to discount the future far too much. In the context of the Social Security decision, they act as if those payments in the far-off years are nearly worthless when, in fact, they can be quite valuable.

The final bias is “reference points,” which refers to the tendency for people to fixate on arbitrary points, and any deviation from those points seems like a gain or loss. Think of the marathon runner who sets a goal to complete the race in four hours. If the runner fails to hit that magic four-hour point and finishes, let’s say, in 4:01, she’s really disappointed—far more disappointed than the pleasure she would feel if she beat the four-hour time by, say, one minute and finished at 3:59.

Now, 4:01 and 3:59 are practically the same time, but the psychological gap between the two is huge.

Reference points matter when deciding how soon to take Social Security because our government has, in effect, built in a reference point, and that is age 62—the earliest age you can collect. In fact, 30% of people start collecting at 62, making it the most frequent age to claim benefits.⁴

Think about the person who has been fixated on age 62 as the claiming date either because he’s always heard that was the date you could start collecting or knew other people who started collecting at 62. For him, any start date past 62 seems like a loss and, as we know, people really hate losses.

So let’s switch gears and bring in our guest, Rob Williams. He’s a colleague of mine at the Schwab Center for Financial Research, and he’s the vice president of financial planning and retirement income. He and his team provide insights on financial planning and retirement topics—including Social Security.

Rob, I appreciate you coming by today.

Rob: Thanks, Mark. Great to be here.

Mark: So let’s start out with the fact that if you claim benefits sooner, your checks are lower than if you claim benefits later. How long does it take to break even once you delay withdrawing?

Rob: Thanks, Mark. That’s a great place to start, and as you said, if you start taking Social Security earlier than your full retirement age, it does reduce your monthly check. But that’s because you’re receiving Social Security checks for a longer time. On the other hand, taking Social Security later means receiving fewer checks during your lifetime, but the checks will be a lot larger. So the break-even is the age when you start to come out ahead in the cumulative benefits you receive if you wait. And it’s tempting to get deep into the math, but a quick example should give us the idea. If you wait until age 66 to claim benefits versus taking it at age 62, you’ll break even at around age 76. So that’s more than a decade before you will start to see the payoff from waiting. 

Mark: So where did 76 come from?

Well that just comes from the math, and it comes from the Social Security Administration, who’s planned it so that, in theory, the break-even point is about the average American’s life expectancy. So if you live exactly as long as the actuarial scientists deep in the basement of the SSA would suggest, in this example 76, then you’ll come out even, no matter if you file early or at full retirement age. The benefit to waiting kicks in if you live longer than what the actuarial scientists project. So every check will be bigger and you’ll receive more income over time.

Mark: So if I was going to claim at 62, but instead I waited until 66, it’s going to take me until 76, another 10 years to break even. That’s about a 14-year time period there, and that seems like a long time. I hear those numbers, and I can see why so many people are eager to start collecting as early as they can, especially given our earlier discussion about present bias. Is it reasonable for people to expect that they’ll be living that long?

Rob: Well, it’s understandable, and this is certainly one of the major biases that for a lot of people, including me, waiting any length of time to receive a benefit can seem like forever. You’re going to wait more than a decade for the so-called break-even point, and you won’t receive payments early, so it’s kind of a double whammy. But actually, it’s likely that if you’re in good health, you’ll live longer. Because averages are averages, and by definition, 50% of individuals are going to live longer, and if you’re one of them, you’ll end up collecting more. 

Mark: So I think that’s really important. 50% of people are going to be living longer than the average life expectancy. So I have a couple of questions about that. First of all, every year I read that life expectancies are going up and up and up. Are these tables kept up to date?

Rob: Well, I said earlier, in theory, that the break-even point is about your life expectancy, but there’s a lot of good evidence that when the Social Security Administration created those schedules, they underestimated how long you’d live. First of all, they were created back in the 1950s, and life expectancy has increased significantly since then. So it’s not intentional; they just haven’t updated those numbers. The life expectancy today of the average 62-year-old American male is 83. For the average 62-year-old female, it’s 86. So remember what I said before: The break-even age in the example we used is 76. So the numbers show that today you have a good chance of living longer than those numbers. In fact, 25% of women who reach 62 will make it to 92, and 10% will make it all the way to 96, and this is according to the Social Security Agency’s own data.⁵

Mark: So follow-up question on that: Are there any patterns in longevity that people should be aware of when they’re thinking of making this decision?

Rob: Interestingly, yes, there are lots of patterns. For one, there’s evidence that people who save and have more money live longer than average, compared to those who don’t. There could be a lot of reasons for this. It could be because they’re wealthier, they can afford better healthcare, and other factors.

It also turns out that there’s research that shows there are factors like saving and investing that correlate with a longer life span, on average. Things like being disciplined about saving and paying attention to your finances—and, dare I say, listening to podcasts about finances—could be seen as habits that lead to paying attention to your finances and leading to a longer life.⁶

Mark: I think the bottom line here is that with all these programs, they are based on averages, but there are good reasons to suggest that for many people they may not be average when it comes to life expectancy. So how do you think about Social Security, Rob? Do you think of it as an investment, the same way you would a stock?

Rob: No, I think that’s a great point. We’ve been talking about break-evens as if they’re investments, and there’s actually research that shows if you think about it as an investment, that you’re going to think about it as this decision of sort of like a gamble when you’re going to break even. But the better way of thinking of Social Security, I think, is to think of it a little bit like insurance. It’s a way to help insure your future. If you’re in good health, aren’t a smoker, have a spouse, or have a family history that indicates that you might live longer than average, then it can be worthwhile to wait in order to receive a larger monthly check, that grows with inflation, and will pay out for as long as you live. That’s a form of insurance, not necessarily an investment.

Mark: So you brought up the issue of spouses. So let’s talk about that a little bit. This is one of those times where the decision you make has consequences not only for yourself, the decision-maker, but also for your spouse. Given that we were just talking about life expectancy, how does having a spouse influence that?

Rob: Well, let’s stick with the math first, and the life expectancy in the numbers we were talking about before tell us that the probability that one spouse in a couple is going to live longer than average, and that’s higher than for someone who’s an individual who is single. This is just called joint probability. But beyond that, some of those behavioral factors just beyond the numbers that show that married couples, on average, may be in better health. They may have better care giving and other things that lead to one member living longer than if they were single.

Mark: So let’s set aside life expectancy for a minute. Are there strategies to consider that help a couple maximize the benefits for both of them?

Rob: So we each get our own Social Security benefits, but it’s important to remember that Social Security really isn’t just an individual decision. If you have a spouse who is also covered by Social Security, there are lots of strategies you can explore to help maximize the benefits for you both. So for example, a lower-earning spouse can file early, say at age 62 or up to full retirement age, and then receive their own benefit. The higher earner might wait to file, up to age 70, and the lower earner starts to receive reduced benefits, but, by waiting, the higher earner gets that larger benefit.

Mark: So what happens when one spouse passes away?

Rob: This is one of the most important insurance features in Social Security. So the surviving spouse is entitled to a survivor benefit, which is equal to the full amount their spouse was getting. So if the lower earner is the survivor, that bump up to the survivor benefit can be significant. If you are the higher-earning spouse, the survivor benefits are reason enough, we think, to consider waiting, if you can. The longer you wait, the higher the survivor benefit for your spouse. This is an especially valuable benefit for women, and, husbands, if you have a spouse and choose to file early, that’s a decision that might impact your spouse. So consider women, who tend to live longer than average, that’s just a hard reality of the statistics, that spousal benefit for the survivor is a really important feature of Social Security.

Mark: So how does this all play out if you are divorced? I’ve got to imagine there are rules for filing against your former spouse’s benefits?

Rob: Well, an unmarried ex-spouse can claim based on their former spouse’s benefits, if they were married for at least 10 years. So the ex-spouse is entitled to the benefits equal to 50% of what the former spouse receives, or would receive, if it is greater than their own benefit. This doesn’t impact the higher-earning former spouse’s benefits at all.

Mark: Rob, we’ve made the case for not taking Social Security at the earliest possible age, but what about the other side of the spectrum? By that I mean is there an age by which you absolutely should be taking Social Security no matter what?

Rob: Well, the maximum age is age 70. So there’s no reason to wait. I suppose you could. But there is no reason that I can imagine where you wouldn’t claim your benefits at least at age 70.

Mark: All right, so we’ve got the end points settled. Definitely start taking it at age 70. If possible, avoid taking it at 62—and we’ve laid out the conditions where filing that early would make sense: if you’re in poor health, if you have a higher-earning spouse who can delay filing, or if you simply need the benefit as soon as possible to cover your living expenses.

But now let’s talk a little bit about what are some steps for people to use to figure out where they should land between those two extremes of 62 and 70.

Rob: Great, here are three points to consider:

And the first is, are you—or your spouse, if you’re married—in average or good health? If you are, there’s a really good chance you’ll live longer than average, and the benefits of waiting for a higher benefit can pay off significantly later in retirement. As we discussed, it can be really difficult to keep an eye on our “future” selves when today is right in front of us. But the three biggest risks in retirement are living longer than expected, not having saved enough, and experiencing market risk in your portfolio. Social Security is really handy because it can help with each of those risks.

Mark: So let me jump in there and talk a little bit about market risk. That’s a term we haven’t used before—elaborate a little bit on what that means.

Rob: Yeah, sure, market risk is … for retirement, we usually have a number of different income sources we could tap for retirement. And some of those are what we would call guaranteed or protected sources of income or cash-flow. Social Security is one of those, paid by the U.S. government. And we probably have some retirement savings. So if you are an investor, retirement savings are exposed to market risk, of course, which is the potential that stocks or other investments, they can fall in value, impacting your income, impacting your retirement. Because Social Security is paid by the government and isn’t connected to or affected by rising or falling interest rates or the stock markets, it’s insulated from market risk.

Mark: OK, so what do we need to think about if filing at 62 is looking good?

Rob: Well, that brings me to the second point, which is, can you afford to wait? If you can, we suggest don’t anchor to age 62 because you’ve heard that someone you know retired at 62 or worry that you’ll regret not taking the money now. Aim for at least full retirement age, if you can, between age 66 and 67 depending on your date of birth—and work, save and plan accordingly. You may choose, or even be forced, to retire early. But, consider, are there other ways you can work or save to make it easier to wait until your full retirement age? Look at your options and plan ahead for the alternatives.

Mark: So Rob, you used the term “full retirement age.” That’s not a term we hear often. I’m guessing it has a specific meaning within the context of Social Security?

Rob: Right, full retirement age is just that age when you are first eligible to receive your full—or unreduced—retirement Social Security benefit. So it’s that age that Social Security bases your benefit on, and if you retire earlier than that, your benefit is reduced, and if you retire later than that up to age 70, you get a credit and your benefit is increased.

Mark: So your first point was about longevity. You’re second point was to wait as long as possible before you start claiming. What’s the third point?

Rob: The third point is to think about Social Security not just in isolation. Retirement has a lot of moving pieces in it, and it can seem very complex, but think about how your savings fit in with Social Security in a coordinated retirement plan. Retirement for most people is going to have several parts. Social Security is only one. So work with a financial planner and consider Social Security, and when to take it, within the context of your personal retirement plan. 

Mark: So Rob, what do you say when people point out that “you know you should take Social Security as soon as possible because the system is going broke and you want to collect as much as you can as soon as you can”?

Rob: Well that’s an understandable question, and I don’t know, Mark, maybe you can tell us if there’s a behavioral bias for having low confidence in government! That’s really what we need to see to make sure Social Security remains in place and paying what we expect. But seriously, I think the program has funding challenges, they’re well publicized, and you can look at the risk in a few ways. The most recent report from the Social Security Administration is one, and it projects that the Trust Fund has enough resources to cover promised benefits until 2034 if there are no changes to the current system. Thereafter, scheduled Social Security taxes are projected to pay about three-quarters of benefits until 2092 in the current system.⁷ So that’s the current system and the current rules.

To fix Social Security for the longer term, it seems there’s a lot of paths that could be taken, and the most likely is probably that there will be an increased full retirement date, for future retirees, so moving it out further. Perhaps means testing, which means lowering benefits for individuals with higher wealth. It’s been many years since the retirement ages were reviewed and adjusted.

But either way, it seems unlikely that the Social Security Administration, under most scenarios, would significantly change the payment structure for current or soon-to-be retirees.

And I don’t want to just say that—I think there is some precedent for this thinking. For example, back in 1982 and '83, when the law was passed, the Social Security system was projected to run out of money. And laws were changed to make adjustments. So the taxes on benefits were increased, the full retirement age was gradually increased over time, coverage was expanded to new federal employees—which meant more people were paying into the Social Security system. But the key point then was that the benefits were changed for future retirees but had no impact on current retirees or those that were coming close to retiring.

Mark: Thanks, Rob. We appreciate you coming by to help decode some of the complexities of the Social Security system.

Rob: Thank you, Mark.

Two final thoughts before I go.

First, the point of this episode isn’t to tell you when exactly to start taking Social Security, but rather to share solid information so that you understand the costs associated with every option.

My advice is to not automatically default to the somewhat arbitrary ages built into a government program. Take the time to consider your own circumstances—and make the decision that’s best for your situation.

While that may seem like an obvious suggestion, many people clearly aren’t following it.⁸

Second, Social Security is very complex—there are over 2,700 rules just around claiming—and sorting through complicated information all over the web can seem overwhelming. That’s why we’ve built a library of easy-to-understand material that covers what you need to know when planning for claiming your benefits. Check it out at schwab.com/socialsecurity.

And if you’re interested in learning more about loss aversion or present bias, listen to Schwab’s Choiceology podcast at schwab.com/podcast, or just search for Choiceology.

Thanks for listening. And if you’ve enjoyed this episode, consider leaving us a review on Apple Podcasts or your listening app. Thanks for listening. For more important disclosures, see the show notes and schwab.com/financialdecoder

¹ “Can You Take Your Benefits Before Full Retirement Age?” Social Security Administration.

² The biases not covered include anchoring, framing, regret aversion, saliency and social norms.

³ Daniel Kahneman and Amos Tversky, “Advances in Prospect Theory: Cumulative Representation of Uncertainty,” Journal of Risk and Uncertainty, October 1992.

⁴ Annual Statistical Supplement to the Social Security Bulletin, 2017

⁵ Social Security Administration, Actuarial Life Table, 2015—the latest data released by the SSA.

⁶ See for example Woolf, Aron, et al., “How Are Income and Wealth Linked to Health and Longevity?” Urban Institute, 2015.

⁷ Social Security Administration, “Status of the Social Security and Medicare Reports,” 2018 Trustee Report.

⁸https://www.marketwatch.com/story/why-people-who-claim-social-security-early-often-live-to-regret-it-2018-09-04