When Should You Take Social Security?

After the Great Recession of 2008 many boomers are wondering when they will be able to retire. With investment values down Social Security might bear the bulk of most retirees income needs. When you start your social security income can have a huge bearing on how comfortable you are during retirement.

For Michiganders, probably the hardest hit state in our union, Social Security is playing a much larger role that anticipated. Two recent studies,  The Elder Economic Security Initiative(TM): The Elder Economic Security Standard(TM) Index for Michigan, and Elders Living on the Edge, When Basic Needs Exceed Income in Michigan show that basic expenses such as food, prescription drugs, medical, utilities and housing maintenance are starting to exceed income in Michigan. Furthermore, one in four Michigan elders relies on Social Security as their sole income source. Unfornunately, it is even worse for women. The average women in Michigan depend on Social Security to supplement the majority (between 49% and 72%) of their income during retirement.[1]

A July 2009 paper published in Journal of Financial Planning entitled Optimal Retirement Age under Normal and Negative Market Conditions suggests that when you begin Social Security should depend on the percentage of your total retirement income that is made up by Social Security. In other words, the greater the proportion of retirement income derived from Social Security, the better it is to wait if you want a better lifestyle.

According to the article, the majority of U.S. workers begin taking Social Security at age 62. On Average, Social Security accounts for 39% of that income. The paper goes on to suggest that if Social Security makes up 40% of your income, you can justify waiting at least a few years. If Social Security is projected to make up 80% of a client’s income, it usually pays to wait until full retirementage.[2] These calculations were run on single Social Security recipients. At the end of the article, the author notes that the calculations are much trickier for married couples.

Based on these three studies one could conclude that most american, and especially Michiganders, are living a inferior lifestyle because they are choosing to take Social Security too soon. Unless you have a large nest egg AND are earning above average return, the average person, particularly in Michigan, is better off waiting until they reach full retirement benefits age before taking Social Security Income.

Other factors not considered in these studies are:
– family longevity, or the average age people in your family usually live
– whether medical costs are covered
– your adversity to risk in the market with your investments

[1] Depending on housing and health circumstances, single elders living in Michigan need between $16,718 and $24,704 to cover basic living costs. (Source)
[2] Find out your full retirement age at the Social Security website.