Getting the most from Social Security is important for a lot of people. More than four out of five non-retirees expect Social Security to be a meaningful source of income in retirement, according to an annual Gallup poll.
But maximizing the size of your monthly check shouldn’t be the ultimate goal for people’s retirement plans.
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When it comes to retirement planning, individuals need to consider the impact their Social Security will actually have on their wellbeing. In economics, this concept is known as utility, or how much happiness is gained from additional money that you receive.
Here are a couple of simple examples. If someone doesn’t have enough money to take care of your basic physiological needs for shelter and food, for example, the utility of additional money you get could be extremely high. Just a small amount could mean the difference between paying the rent and facing homelessness.
By contrast, for those who have millions of dollars set aside for retirement, getting an extra dollar or two each month doesn’t really make that big a difference in their lives. In economic terms, the utility of each additional $1 is lower for wealthier people.
The graphic below shows the amount of utility an example individual derives from income. (The graph for every individual will be different, but it generally follows a similar curve.) As you can see, the first few dollars have a huge impact, but there are diminishing returns to increasing income.
Image source: Author.
If you consider how much utility your Social Security benefit can provide, you may not end up with the largest possible monthly check. You will, however, maximize how much you can enjoy your retirement.
How maximizing utility can impact when you claim Social Security
In order to maximize utility, retirees need to consider where they fall on the curve above. Someone who believes they fall closer to the left side of the curve will get a lot more utility from their Social Security check than someone who considers themselves further to the right side of the curve.
Consider someone who has to have a career-ending surgery at age 60. They didn’t get a chance to save as much as they had planned for retirement, plus they had to start withdrawing their retirement savings sooner than expected. When they get to age 62 and become eligible for Social Security, they may see a huge benefit to claiming early.
Adding Social Security to their retirement savings budget could move them along the highlighted area of the graph below.
Image source: Author.
As you can see, they move much higher on the graph by taking Social Security early. Their quality of life will improve immensely, even if it means they’ll receive less in absolute dollar terms than they would if they waited.
Now, consider someone who had a long and fulfilling career. They dutifully saved for retirement, and they’ve actually been talking to their financial advisor about estate planning and leaving money to their kids and favorite charitable organizations. They have all the money they need, and they can even go on vacations and visit their grandchildren whenever they fancy.
Claiming Social Security could move them along the following highlighted portion of the graph.
Image source: Author.
The same increase in income as the first person resulted in a much smaller increase in utility. Of course, more money is always better, but it’s going to take a lot more money than they could receive from Social Security for them to move significantly higher on the graph.
In this case, it probably makes the most sense for the person to delay Social Security as long as possible. Getting more later could give this person more money to leave to heirs or donate to charity. In the grand scheme of this person’s life, though, their Social Security decision isn’t going to make a big difference in how they live in retirement.
How to maximize utility for yourself
You’ll likely fall somewhere in between these two extremes. Only you can determine how much a monthly Social Security check will impact your life and the circumstances in which it makes sense to forego the maximum possible Social Security check you could receive.
The good news is if you decide to claim your benefits early, you have an opportunity to reverse your decision if you realize you haven’t optimized for utility. Importantly, you can only do this once per lifetime, you have to act relatively quickly, and you’ll have to pay back what you received.
If you file to withdraw your application within 12 months of your initial benefits approval and pay back what you received, you can go back to how things were. Your benefit will continue to increase each month you delay your claim.
While you may want to maximize the amount you receive every month, you shouldn’t sacrifice what could be a quality retirement in your 60s for the chance of living moderately better in your 70s.
