Objective Preserved social functioning is of utmost importance for older individuals living in the community to maintain independency. However, in patients with schizophrenia or bipolar disorder, it remains unclear which factors influence social functioning in later life. Methods In a catchment area‐based study in Amsterdam, The Netherlands, 120 older (>60 years) community‐living patients with schizophrenia (n = 73) and with bipolar disorder (n = 47) were included. Clinical interviews on social functioning and psychometric measurements were applied. Results Patients with schizophrenia scored lower on all social measures (social functioning, social participation, network size, availability of confidants) compared with their peers with bipolar disorder. In patients with schizophrenia, lower social functioning was associated with having more negative symptoms and depressive symptoms. Age of onset was also associated with social functioning in schizophrenia, with higher scores in very late‐onset schizophrenia‐like psychosis. Unfavourable social functioning in patients with bipolar disorder was associated with lower cognitive functioning. Furthermore, in both groups, social functioning was not related to age, having offspring or the presence of a partner. Conclusions In community‐living older patients, schizophrenia has a more disruptive effect on social functioning than bipolar disorder, except in those with a very late‐onset schizophrenia‐like psychosis. Minimizing residual depressive symptoms and optimizing cognitive functioning may be targets for improving social functioning and independent‐living in older patients with severe mental illness. Copyright © 2016 John Wiley & Sons, Ltd.