By John Zeltmann

I was speaking with everyone's favorite skeptic, Billy Know-It-All, recently (you know, the one who claims that Social Security is bankrupt?), and he was up to his old antics again.  We were discussing the optimal time for him to claim Social Security, and inevitably life expectancy comes up.

"I'm not going to live past 80!  I know it.  My Mother lived to 82, Dad died at 72.  Longevity doesn't run in my family.  Plus...who wants to live that long anyway?!"

- Billy Know-It-All

Social Security is one of your most valuable assets in that it lasts as long as you do, it adjusts annually for inflation, and it's backed by the U.S. government.  And given its value in your financial plan, it's critical we choose the optimal time to turn it on.  Part of what goes into that analysis is life expectancy.  In general, people underestimate how long they'll live.  Let's check out some statistics.

Source: Source: The Society of Actuaries Committee on Life Insurance Research.  All calculations based on Annuity 2000 Mortality Table.

Reviewing the chart above, for a 65-year-old non-smoker, married couple, there's a greater than 50% chance they both live to age 80 and a 60% chance that one of them makes it to age 90.  In both cases, the probability is significant that both or one of you, respectively, reaches one of those milestones.

And yet, when we look at Social Security collections, approximately 90% of people claim at or before Full Retirement Age, and the majority of those folks are collecting at age 62.  Why is that?  Likely for a few reasons:

• They need the cash flow - Many people don't have retirement savings and therefore need to turn on this valuable source of cash flow to meet living needs.  In nearly all of these cases, it makes sense to collect upon eligibility.
• They don't think they'll live long enough to make the delay strategy payoff - As we're addressing in this article, people tend to live much longer than they think.
• They believe the system is going bankrupt - There's a common misconception that the Social Security system is doomed - I would contend otherwise.
• They don't think there's any value to delaying - Why not take the money and run?  There's no financial benefit to delaying, right?

Ultimately, you should understand how Social Security fits into your overall retirement picture.  People's tendency to underestimate their own life expectancy coupled with misconceptions about the future of Social Security and lack of value behind making the optimal decision can detract from a sound retirement plan.  Make sure you make the right choice.

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