When you’re young, you have a lifetime of earnings from employment ahead of you and so you can afford to be less risk-averse. For those in their twenties, an aggressive investment portfolio is recommended; one that is heavy in common stocks and contains a substantial proportion of international stocks which include the higher-risk emerging markets. As you get older, however, you should begin to cut back on riskier investments and start increasing the proportion of your portfolio committed to bonds and stocks that pay generous dividends. In retirement, a portfolio weighted heavily in a variety of bonds is recommended (A Random Walk Down Wall Street, 376).
Considering that less than half of all Americans have any kind of retirement account, and those who do only have about $35,000 in it, it would be best to work during your retirement years and to control your expenses and save as much as possible. Plus, it has even been shown that for those working into retirement, there are great psychological and health benefits that follow. For example, those who continue to work often have a better feeling of self-worth and connectedness and are also healthier. In A Random Walk Down Wall Street, Malkiel advises that in order to maximize annual benefits, everyone should delay retirement as long as possible and put off taking Social Security until full retirement age. Nearly half of all retirees will live longer than their average life expectancy; yet most will have failed to save adequately for retirement, given that we have tended to be a nation of consumers rather than savers. It would only be beneficial for those in very poor health with a short life expectancy to start taking the benefits at the earliest age at which you can start collecting (380-381).
So, what is the best way to maximize the benefits you receive over your lifetime? Do you start collecting in the first year of eligibility, at age 62, and accept smaller monthly payments? Do you wait until age 70, when you could qualify for the maximum payment based on your salary history? Or do you start collecting sometime in between 62 and 70? When it comes down to it in the end, the most important factors are your expected longevity and your individual financial situation. In the Wall Street Journal, two financial advisors discuss which is the smarter move: taking the sure thing now or holding out for the larger payment down the road.
For most, the objective should be to delay benefits until age 70. By waiting until 70, you will receive an additional 8% a year for every year past your so-called full retirement age. If you have planned ahead and have saved enough money to live on, you can retire whenever you wish while still delaying Social Security, thereby maximizing the amount you’ll receive over your lifetime. So for those who can wait to put off retirement, the benefits can be well worth it.
On the other hand, starting to collect your benefits early not only helps you pay your bills, but it gives you more financial choices and the likelihood of achieving the best long-term personal outcome. Collecting early could allow you to pursue investment opportunities that could possibly increase your portfolio.
So why collect early and risk putting your benefits in the stock market when you can make a guaranteed 8% a year simply by waiting to age 70 to collect? While you may have to draw on your resources more by waiting, after 70, you’ll have a greatly increased cash flow.