When it comes to planning for retirement, and choosing when to start claiming Social Security benefits, one of the key inputs into our decisions is how long we expect to live.
Seniors can choose when they want to start taking Social Security payouts; wait longer, and the monthly check from the Social Security Administration is bigger. A high earner who was eligible for the maximum Social Security payout amounts would get $2,209 per month if she started claiming benefits at age 62, but $3,770 if she waited until age 70, a bump of 70%. It’s an important decision, and United Income estimates that households miss out on an average of $111,000 by claiming Social Security at a suboptimal time, usually, from starting to take Social Security too early. Let’s say you’re deciding between taking Social Security at age 62, or waiting until age 66: according to calculations by Charles Schwab, if you live to be 78, you’d be better off having waited, otherwise, your total payouts would have been higher if you started claiming at 62.
Why are so many Americans claiming Social Security too early? Of course, Americans without much in retirement savings may feel like they have no other choice, but the fact that many Americans underestimate their longevity may be another important cause. A simple mathematical concept called “conditional probability” helps explain why this happens.
You’re likely familiar with the U.S. life expectancy: 81 years for women, and 76 years for men. But for adults who have already lived to be 40, 50, or 60 years old, those figures no longer apply. A standard “life expectancy” statistic considers all sorts of tragic scenarios, including death in childhood or adolescence. Every additional day you live changes your personal life expectancy, simply because you’ve survived a bit longer. According to data from the Social Security Administration, a woman who is age 20 has added 251 days to her life expectancy compared to when she was a newborn. If she’s age 40, she’s added 1.51 years, and if she’s age 60, she’s added a full 3.61 years. These effects are even stronger for men, who have more early-in-life accidents; a man who reaches the age of 60 has added 5.57 years to his life expectancy. This is where the idea of “conditional probability” comes in; while most boys and men won’t live until their 80th birthday, the odds that a man will live to be that age, conditional on him already being 53 years or older, are more than 50:50. Most people won’t finalize their decision about when to start claiming Social Security until they’re in their 60s, so this effect is particularly important.
According to the Stanford Center on Longevity, two in three pre-retiree men underestimate the life expectancy of the average 65-year-old man. When we try to guess how long we’ll live, we can be subject to a range of “framing effects” that influence our forecasts. For example, research by John Payne and colleagues in the Journal of Risk and Uncertainty shows that when people are asked to predict the likelihood that they will “live to be 85 years or older,” they assume a much longer lifespan than when they are asked to predict the likelihood that they will “die at age 85 or younger.” Payne found that this “live to” or “die by” framing causes people to change their self-assessed life expectancy by roughly eight years.
What does this mean for you?
Your own life expectancy depends on a range of factors, most importantly, your health. The Social Security Administration provides life expectancy tables that account for the “conditional probability” of having reached a particular age, but you may find a calculator that takes into account your health status to be more accurate. Research by Stephen Aichele and colleagues in Psychological Science shows you can trust your gut instincts about whether you’re healthier or sicker than the average person; subjective health status is one of the best predictors of longevity.
And of course, when you make critical decisions about retirement, you won’t just want to consider the “average” lifespan; you’ll also want to take into account the possibility that you’ll live to be 80, 90 or 100.
When in doubt, most experts suggest you should wait as long as you can to claim Social Security — given that you may live much longer than you expect, holding off for the bigger check can provide you with additional peace of mind.