The Social Security Trap: When Waiting Until 70 Becomes a Huge Mistake - Root Financial

Are you considering delaying your Social Security benefits until age 70 based on the belief that the break-even age is around 80 or 81? This may not be the best decision for you. In this post, we’ll delve into a real client example to illustrate how seemingly sound decisions around Social Security can have profound implications on your financial plan.

The Case of Greg and Sherry:

Greg and Sherry, a couple aged 62, approached us with the goal of retiring immediately. They had a substantial portfolio, including 401(k)s, Roth IRAs, savings, and a paid-off home. Their aim was to maintain a $6,000 monthly lifestyle throughout retirement, accounting for healthcare expenses and taxes.

Key Assumptions:

  • Aggressive Investment Mix: 90% in diversified stocks, 10% in various bonds, projecting an 8.8% annual return.
  • Longevity: Projected lifespan until age 95.

Social Security Dilemma:

The traditional analysis suggests that delaying Social Security until age 70 yields greater lifetime benefits. However, a detailed examination reveals a critical factor often overlooked – the impact of delayed Social Security on the overall financial plan.

Initial Analysis: If Greg and Sherry chose to collect Social Security at 62, their portfolio would maintain a healthy trajectory, allowing them to meet their expenses over the years. The net effect was positive.

Counterintuitive Results: When they considered delaying Social Security until age 70, the seemingly increased benefits came at a cost. The strain on their portfolio during the years without Social Security income significantly offset the potential gains, resulting in over $400,000 less at the end of their lifetime.

The Role of Investment Growth:

James emphasizes the often-underappreciated role of the rate of return on investments. In a hypothetical scenario with a lower growth rate of 6.3%, delaying Social Security until age 70 proved to be more financially advantageous, adding over $850,000 to their overall wealth.

Understanding Break-Even Ages:

While the break-even age is commonly cited as a justification for delaying Social Security, the analysis reveals a more nuanced reality. Even with the additional wealth created by delaying, the break-even age could still be around 86.

The decision on when to collect Social Security is complex and interconnected with various aspects of your financial plan. A holistic approach, considering factors like investment growth, tax implications, and other income sources, is crucial. There is no one-size-fits-all solution, and a personalized analysis based on individual circumstances is imperative.

As you navigate the landscape of Social Security decisions, remember that the right strategy for one person may not be suitable for another. Seeking professional advice tailored to your unique financial situation is key to making informed decisions and securing a comfortable retirement.

Need help with your retirement?

Work directly with a licensed financial advisor at Root. Book a no-obligation initial call now so we can show you how we’ve helped hundreds of people just like you build a retirement they love.