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Updated on Tuesday, March 23, 2021
More than 1 in 5 married couples and more than 2 in 5 unmarried individuals who are 65 and older rely on Social Security for 90% or more of their income, according to the Social Security Administration.
That’s important because the average difference between retiring at 62 and 70 across the 50 states and the District of Columbia is equal to nearly $1,200 in monthly Social Security benefits, according to simulated benefits scenarios from MagnifyMoney researchers.
In a rough economic climate with high unemployment, older Americans may be doing the math to decide whether they should retire early and begin receiving Social Security before achieving the maximum benefits amount at age 70. Here’s what we learned on how that impacts housing costs.
- Key findings
- Retiring early has biggest impact on housing costs in Hawaii, California and New Jersey
- How the Social Security math breaks down: Alabama scenario
- Can you rely on Social Security?
- 4 tips if you’re looking to retire early
- Across the 50 states and the District of Columbia, the average difference between retiring at 62 and 70 is equal to nearly $1,200 in monthly Social Security benefits. That’s roughly 30.1% of monthly housing costs, on average, across the 50 states and D.C.
- By retiring early, potential Social Security benefits would cover less housing costs in Hawaii, California and New Jersey, three high cost-of-living states that take the top spots on our list. Meanwhile, West Virginia, Arkansas and North Dakota take the bottom spots.
- For older Americans, a significant chunk of those benefits go toward housing. According to Census Bureau estimates, 54% of renters and 24% of homeowners 65 and older are housing-cost burdened, meaning they spend at least 30% of their income on housing.
- Life expectancy can be a significant factor to consider when deciding whether to retire early — but not always. Assuming one lives to 79 — the average expected age for an American — the financial difference between retiring at 62 and 70 isn’t as large as you might expect. For example, someone in Alabama with average local earnings who retired at 62 would get $302,832 in lifetime Social Security benefits. If they waited until 70 and took the max benefits for nine years, they would get $296,150 in lifetime Social Security benefits — a decrease of just 2.2%.
Retiring early has biggest impact on housing costs in Hawaii, California and New Jersey
Residents in the most expensive states generally have the most to lose if they retire early. Social Security benefits are progressive, so they replace a higher percentage of pre-retirement income the less you make.
Hawaii, California and New Jersey, the top three states in our study, rank between second and fourth in median monthly housing costs. And it’s in these states where you see the largest percentage difference in housing costs for those who retire at 62 versus those who retire at 70.
In the District of Columbia, where full-time workers on average make $80,445 annually — the most in the country — monthly Social Security benefits would equal $2,178 if retiring at 62 and $3,832 if retiring at 70.
But housing costs in D.C. are a major hurdle regardless of at what age you retire. Social Security benefits would cover 80.3% of housing costs in the first scenario and 45.6% of housing costs in the second scenario. For that difference, the District of Columbia only ranks 13th.
In California and Hawaii, for example, the average home would cost roughly 39% and 40%, respectively, of income for the average full-time worker. That relationship carries over into retirement.
Ranking at the bottom of the study are low cost-of-living states where earnings are modest. In West Virginia, we estimate that the difference between retiring at 62 and at 70 is whether housing costs eat up 43.9% or 24.9% of your Social Security check — a difference of 19%. In Arkansas and North Dakota, the math is similar.
How the Social Security math breaks down: Alabama scenario
Social Security benefits are paid out for life. That means the longer you live, the more you get. Those retiring at 62 would need to factor in the eight extra years of benefits before reaching age 70.
If we use an example of Alabama, where the average worker earns $42,414, those who retire at 62 would receive $1,402 monthly in Social Security benefits. If they waited until 70, their benefits would rise to $2,468. However, the average American only lives until 79, according to data from the World Bank.
Would you rather earn $1,402 every month for 17 years or $2,468 every month for nine years?
Retiring at 62 would yield $302,832 in lifetime Social Security, more than the lifetime Social Security benefits on offer if you retired at 70, $296,150. (In fact, the best option would be to retire at 66, which we estimate would yield $314,160 in lifetime benefits.)
Longer life span shifts math toward retiring later
But there’s another twist in the tale. While the average American lives to 79, the average American who lives until retirement age lives longer than that.
The average 62-year-old lives an additional 21 years, according to the Social Security Administration. Meanwhile, the average person alive at 70 can expect to live to 85.
A longer life span shifts the math toward retiring later. If you lived until 83 in the Alabama scenario, retiring at 70 would be the ideal age to retire at for maximum Social Security benefits.
No one knows how long they will live, though. And depending on your financial situation, it may make the most sense to lock in lower benefits at 62 then struggle financially trying to wait to lock in greater benefits at 66 or 70.
Alternatively, if you have a good amount saved for retirement — let’s say in an online portfolio — you could stop working at 62, live off your retirement and wait until you’re older to start taking in Social Security.
Can you rely on Social Security?
For most of the history of the Social Security trust fund, it was taking in more in taxes than it was paying out.
But since 2010, the fund has been paying out more than it has been taking in. The latest projections suggest that the fund will run out of money in 2034, exacerbated in part by the long-term economic impacts from the COVID-19 pandemic. Even if the Social Security fund runs out of money, it doesn’t mean payments would halt, but only a portion of benefits would be paid out.
With such gloomy projections of the long-term health of the Social Security program, it would be best to have your own retirement fund squirreled away.
How to think about Social Security doesn’t align for many Americans
The best way — or the most financially prudent way — to think about Social Security is as a monthly bump on top of your private investments, according to DepositAccounts founder Ken Tumin.
“Social Security should be thought of as a supplement to other sources of retirement income,” he said. “The primary source of retirement income should come from pensions and/or retirement savings such 401(k)s and IRAs.”
Unfortunately, many Americans still have some ground to make up on that front. According to a Gallup poll, 57% of retirees said Social Security is a major source of income for them.
Living elsewhere to stretch your Social Security dollars
Though there are great reasons to retire in the place you lived and work (being close to friends, family and familiar surroundings), there are also good financial reasons to leave.
Every year, thousands of retirees do the math and find that Arizona and Florida, to just give two examples, are great retirement destinations — not only for the weather, but because they’re affordable. Someone who worked their whole life in New York, for example, and took advantage of the higher average earnings there could move to Florida with their Social Security benefits and find somewhere warm and affordable to retire.
Retiring later can be good not only because you unlock larger monthly Social Security benefits, but it also means you’re working a few extra years, saving more and — crucially — not drawing down your retirement fund. Depending on how much you have saved and how it’s invested, leaving that money to grow an extra four to eight years on the stock market could mean tens of thousands in extra retirement income.
4 tips if you’re looking to retire early
- Self-fund your retirement. Relying exclusively on Social Security to fund an early retirement is difficult. But if you can save early and invest in a retirement fund for yourself, you can then use Social Security to supplement your retirement income, assuming it’s still available.
- Start investing early. Even if you aren’t able to save up much early in your career, the difference in every dollar saved early on can snowball. For example, if you saved $5,000 early in your career and contributed $100 a month to that fund at a 6% annual rate of return, it would balloon to more than $131,000 after 30 years from monthly compound interest. You can try our compound interest calculator to see how much you could earn.
- Invest for growth. When you’re younger and looking to invest, you’re typically in a better position to take on risk. When you take on more risk, you typically see better returns. By investing in stocks rather than putting money in certificates of deposit (CDs), you might lose some money early on, but you should see better returns long term. You can then use these better returns to fund an early retirement.
- Don’t give up in catching up. “Those who are in their 50s and are behind in their retirement savings should take advantage of the catch-up provisions of 401(k)s and IRAs,” Tumin said. These provisions allow workers 50 and older to make additional yearly contributions.
Researchers estimated Social Security benefits for the average worker in every state and compared them to housing costs. We compared three situations: retiring at 62, 66 and 70.
To estimate retirement benefits, researchers assumed the prospective retiree was a 62-year-old with a lifetime average earnings equal to the local average for a full-time worker and an annual 2% inflation rate.
We also assumed the worker was married and their spouse didn’t work. 2019 data on housing costs and earnings comes from the U.S. Census Bureau.