Retirees in the United States are choosing to throw away a fortune.
On average, Americans deliberately miss out on $111,000 in Social Security payments over the course of their retirement-age years, according to a 2019 study by financial technology firm United Income.
That’s because one-third of Americans claim at 62, the youngest age possible, and a mere 4% maximize their income by waiting until the latest claiming age of 70.
The study found that nearly 60% of Americans enroll before their full retirement age (67 for those born in 1960 and later) and sacrifice up to 30% of their benefits as a result. Collectively, retirees in America will take a pass on an estimated $3.4 trillion because they enroll at a sub-optimal time.
The Social Security Administration (SSA) says two-thirds of older Americans depend on the program for more than half of their income, yet a fraction of recipients maximize their payouts.
Created in 1935, Social Security’s retirement program was intended to supplement – not entirely replace – the income of Americans as they left the workforce. At the time, the average life expectancy was 62, compared to 79 today. And the prospect of 20-plus years of retirement, which is common today, was unlikely for most Americans.
Improvements in health care and increases in life expectancy over the years led Congress in 1983 to adjust the full-eligibility ages, which now range from 65 for those born before 1938 to 67 for those born after 1959.
Determining the right age to claim your hard-earned Social Security benefits may be one of your most consequential financial decisions. Your options are to claim before your full retirement age and settle for a reduction of up to 30% of your full benefits; receive 100% of benefits at your full retirement age; or receive up to a 32% monthly increase on top of your full benefit by waiting to age 70.
Certainly, each person has unique circumstances and goals to consider in making their claiming decision. Some people simply can’t afford to delay payments. They need the available income due to unemployment, a lack of savings and investments, indebtedness or other financial pressures. Some don’t anticipate a long life and decide that delaying is a disadvantage. They may simply choose to enroll at 62 because they don’t expect to live beyond another decade or so.
Others may give in to temptation. Knowing an income stream is there for the taking, a retiree may succumb to tapping the reserves before they are truly needed. People like to be rewarded, and as workers approach their 62nd birthday, an emotional need may be more powerful than prudent financial planning.
Your timing decision also may depend on if you plan to work beyond age 62, until your full retirement age or through the maximum benefit age of 70. Working longer makes it easier to delay claiming Social Security benefits or rely on savings, investments or other resources. Also, those who claim early and continue working may have their benefits reduced if their earnings exceed SSA’s annual limit, which was $17,640 in 2019. Benefit payments could be reduced by as much as $1 for every $2 earned above the earnings limit.
Your claiming age also will affect the benefits provided to members of your family based on your record. Your spouse or children may qualify for a monthly payment up to half of your full retirement benefit amount. If you claim early, the amounts provided to your children and current and former spouses will be reduced.
Let’s assume your benefit at your full retirement age of 67 is $2,000 per month. That monthly amount would increase by 8% each year you delay claiming. So, by claiming at 68, you would receive $2,160. At 69, the payout would increase to $2,320. By delaying until the maximum age of 70, you would receive 124% of the full amount, or $2,480 monthly.
For early claimers, the numbers head in the opposite direction. If you claim at age 62, you’ll take a 30% hit, reducing the payout from $2,000 to $1,400. The benefit amount would be 75% of $2,000 at age 63 ($1,500); 80% at 64 ($1,600); 86% at 65 ($1,733); and 93% at age 66 ($1,866).
The $1,400 you’d receive at age 62 is $1,080 a month (or 43.5 percent) less than the $2,480 as a result of the delayed retirement credits you’d receive at age 70.
One critical factor to consider is how long you expect to live. According to SSA data, a man reaching 65 today can expect to live, on average, to 84.3. For women, it’s 86.7 – more than two years longer. In fact, about one in four 65-year-olds will live past 90, and one in 10 will live beyond 95.
Based on the $2,000 example and an annual 2% cost of living adjustment, a 62-year-old claimant living to age 85 would receive a total cumulative benefit of about $515,000. If the person claimed at 67, the cumulative benefit would be about $100,000 higher. The break-even point for those two claiming ages is about 76.
Your life expectancy and benefit amount are just part of your considerations. You also need to consider optimizing the benefit for your spousal and survivor benefits. Your filing age and benefit amount will impact the benefit amount your survivors can receive.
Gender is another factor to consider. Women tend to live longer, but they depend on Social Security more than men, SSA figures show. For the average female claimant, Social Security represents 47% of their total income; it’s 34% for men. So, delaying filing may be even more advantageous for women. The SSA also reports that men have higher average earnings than women, and their benefit amounts are higher. The bottom line: Women are likely to outlive men and need the income more than men.
Claiming early also causes a reduction in spousal benefits available for current and divorced spouses (if the former marriage lasted at least 10). Claimants are eligible for up to 50% of a spouse’s benefit amount. But if you claim spousal benefits before your own full retirement age, your payments will be reduced from the maximum 50% to as little as 32.5% of the full benefit.
Whatever the case, a self-inflicted penalty is a financial strategy that experts widely discourage when there are big advantages for those who wait.
Before you apply for retirement benefits, the SSA offers the following “basics” you should know about:
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