Making Sense of Social Security

As a professor, it may be daunting to think about the day when you’ll hang up the robes for the last time, but the sooner you start to plan for it, the better off you’ll be. It can take time—even years—to become fully prepared both personally and financially for that next phase of your life. As you enter your 60s, consider putting together a road map leading up to your exit from academic life, which should include a financial plan outlining your personal and financial goals for retirement.

Your financial plan can help you identify the monetary gap between your current financial position and your ability to accomplish your personal goals. Planning for retirement includes many decisions, which is why a financial adviser who understands your background can help. Transitioning to retirement involves replacing your paycheck with new income streams, one of which is Social Security. The ages at which you retire and when you begin to draw Social Security are two of the most important retirement planning decisions you’ll make.

There are three important ages when considering Social Security: a) age 62, b) your full retirement age (FRA) and c) age 70. We’ll begin with the second: your FRA, which is simply the age at which you will receive your full Social Security benefit. Although yours is likely between the ages of 66 and 67, log on to SSA.gov to see exactly what it is. Knowing your FRA is a key step in the planning process.

At the two extremes are ages 62 and 70. On the one hand, age 62 is the soonest you can claim Social Security, which comes with a reduction to the FRA benefit amount. There is a rather complicated formula to determine by how much your full benefit will be reduced if you claim early, but you can use a calculator on SSA.gov for estimates. (Also, keep in mind the possibility of reduced benefits if you draw early and are still earning an income.) For a straightforward example, if you retire at age 62 and want to start collecting Social Security, your full benefit would be reduced by 30 percent. On the other hand, if you postpone taking Social Security until after your FRA, you would receive an 8 percent credit each year you wait until age 70, making this an enticing option for many. Think about it this way: How many times has your institution given you an 8 percent bump in salary in one given year, let alone multiple years in a row?

Although this choice may seem simple at first, something that is often overlooked is your Social Security break-even point. If you delay drawing on your Social Security and take the benefit credit, how many more years do you have to live to make up for the delayed Social Security payments? This is your break-even point. If you make it to that age and a day more, then your decision to delay will have earned you more money in overall take-home benefit; otherwise, if you pass away before your break-even age, you would have benefited by taking your Social Security earlier.

For example, take a 61-year-old who is about to retire and is expected to live to age 80. The nationwide average Social Security benefit (as of January 2024) at FRA is $1,907. If they retire and draw early at age 62, their benefit could be reduced to $1,334 per month, or $6,876 less per year. Assuming they do live to age 80 (another 18 years) while drawing on Social Security, their total lifetime benefit amount could total $288,144.

On the other hand, let’s now assume this same person with the same life expectancy delays until age 70, or three years after their FRA, and receives an increase of 24 percent (8 percent for each year). Their increased monthly benefit at age 70 of $2,364.68 would accumulate to $283,762 by age 80 (compared to $288,144 in the earlier example). For this person, it may have made sense to draw on their Social Security earlier, possibly even at age 62.

Now, to illustrate the point another way: What if this same person lives longer than expected—to age 100 instead of 80? Rather than being beneficial, drawing early could end up costing them approximately $250,000 in reduced Social Security benefits over their lifetime ($851,284.80 and $608,304 for drawing at age 70 versus at age 62, respectively). Of course, no one knows exactly when we’ll pass, but the point here is to illustrate how financially impactful this decision can be.

I believe life is about more than the money you might gain or lose by taking Social Security early, at full retirement age, or later: Money should be seen as a tool in our lives. For instance, consider what you want to do in retirement and how Social Security income will help you accomplish those goals. I also recommend thinking about life expectancy. How is your health and your family’s longevity? If you expect to live a shorter life, then taking Social Security early might be a good option, whereas delaying could be better if you expect to live well into your 80s.

Also consider the three phases of retirement. Your go-go years—or your first and most active phase—are generally the first 10 to 15 years from your FRA. This is likely the period when you’ll desire to and be able to do the most travel, service and other activities requiring greater financial (and physical) resources. The slow-go years—stretching until about your mid-80s, and your no-go years thereafter—may present changes to your retirement income needs due to health.

Choosing when to claim will be unique to each person and is a critical piece of retirement planning. In either case, if you’re like a good majority of academics, you may plan on working well into your late 60s or early 70s, for a variety of reasons. However, the more you understand Social Security and its role in retirement planning, the more you can take full advantage of the time and opportunities life has to give you.