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Why Most Social Security Advice Is Wrong

Dan Caplinger, The Motley Fool

The Social Security program touches nearly every American's financial life. Whether you're among the roughly 60 million people who currently receive benefits or the tens of millions more who hope to get payments in retirement or if they become disabled, understanding how Social Security works is a crucial part of your financial planning.

It's therefore not surprising to see so many people offering financial advice on how to deal with Social Security. You'll hear all sorts of advice, ranging from "Wait as long as you can before claiming your benefits," to "Claim as early as you can." Yet in trying to overgeneralize what is at its heart a highly individualized decision, nearly all of that advice makes fundamental errors by making assumptions that don't reflect reality. Here are two key reasons why so much advice about Social Security is inherently flawed.

Three Social Security cards with a brass key on top of them.

Image source: Getty Images.

1. Most Social Security advice ignores personal utility of money

Nearly all financial advice about Social Security asks the question of how you can get the most from the program. By that, most writers define "the most" as the maximum number of dollars over the course of your lifetime. That's the foundation of break-even analysis -- looking at different claiming ages to figure out how long you'd have to live in order to get more money by waiting versus taking benefits earlier.

As someone who values mathematical analysis, I totally understand why that's such an appealing way to address the question. You can make calculations using a wide range of scenarios to cover nearly every conceivable outcome, and then easily make comparisons to draw objective conclusions about different strategies.

Yet even basic economics realizes that using money as a substitute for each individual's determination of personal utility can lead to mistaken judgments. The best example in the retirement context involves lifestyle activities that are likely to become impossible to enjoy as you grow older.

If you've always wanted to do a mountaineering expedition and are fortunate enough to still be in good enough shape to do so at 62, then claiming Social Security early in order to finance that dream right away might well give you the only chance you'll have to make it a reality. Sure, waiting until age 70 to claim might give you more money -- but you bear the risk of a decline in your fitness level, making it entirely impossible for you to achieve your dreams.

This can work both ways. For some, it's worth it to delay Social Security and work longer in order to maximize financial support so as not to be a burden to family members later in life. That might be the case even if objective analysis would suggest claiming earlier. By ignoring the values that go into people's decisions about what Social Security is truly worth, an approach driven purely by dollars misses the mark.

2. Most Social Security analysis leaves out need-based financial support programs

Another mistake that most Social Security analysis makes is to leave out other potential sources of retirement income. The assumption that people don't want to run out of money is a completely reasonable one to make. But by ignoring the need-based programs that provide financial support to low-income retirees, such as the Social Security Administration's Supplemental Security Income program, analysts come to the conclusion that people have more of an interest in maximizing future benefits than they in fact do.

Various public assistance programs tend to base their own benefits on total income, which usually includes Social Security. In most cases, this can act as an incentive to claim lower Social Security benefits earlier, because the resulting smaller payments later in life are more likely to leave you with an income level that's low enough to qualify for other assistance. The converse -- delaying Social Security in order to keep collecting need-based support -- isn't as prevalent of a problem because most need-based programs require that you claim your Social Security as an alternative income source that's available to you.

That's not to say that most people deliberately choose a claiming strategy with those benefits in mind. However, the fact that financial safety nets exist to help retirees avoid worst-case scenarios can make people much more comfortable shifting Social Security earlier than they'd be if those safety nets didn't exist.

Know the flaws

These two problems with most Social Security advice don't make guidance on retirement benefits completely useless. However, you need to make your own personal assessment of how much these blind spots in most analysis of the program affect the best decision for you. By doing so, you'll be able to make a choice that best reflects your own personal values and take responsibility for the consequences.

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