Claiming Social Security Too Early Could Mean Losing Money.

Regardless of the fact that everyone is talking about how to maximize Social Security benefits, few are listening. Only 4% of retires hold off claiming Social Security until age 70. How much this can cost retires in retirement income and overall wealth is worth mentioning. 

Let’s look at some numbers. $1 trillion is paid out each year to more than 65 million retires. This makes up one-third of total retirement income. 50% claim that this makes up more than half of their yearly retirement income, while a third claim 90% of their yearly retirement income comes from Social Security. 

The study, “The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions,” looks at the impact of drawing Social Security before full retirement age. Matt Fellowes, head of United Income, and by two top researchers formerly from the Social Security Administration co-authored the study. 

Optimizing decisions about when to draw on Social Security, and not claiming too early, can result in an average of $111,000 per household, the study found. Across the board, this adds up to a substantial amount of money and could improve retirement for many Americans. 

The study states that “About 92% of retirees that claimed Social Security suboptimally would have seen their annual income increase if they had made the claiming decision that maximized the probability they would have enough money to afford retirement,”  Annual income for more than half of retirees would increase by 25% or more.

This means that 21% of retires that may not be able to afford retirement would have improved their overall retirement funds if they waited to claim at a later date. 

The most popular way to delay drawing on Social Security is to work longer. Others that can afford to can draw on their savings until 70 to claim maximum benefits. 

How much wealth you have at end-of-life can be enormously impacted by when you claim Social Security benefits. The fact is that while most will lose wealth during their 60s and early 70s, their wealth would be greater if they relied on investments during the early retirement years and utilized Social Security more than investment income in the later years. 

$2.1 trillion dollars is the impact felt collectively when current retirees decide to claim benefits early, for an average of $68,000 per household.

The ease with which one can claim Social Security benefits as early as the age of 62 is part of the issue, while retirees don’t often realize that this can reduce their benefits by 25% or more throughout their lifetime. 

The authors suggested that a change in public policy could encourage people toward claiming benefits later. “We believe early claiming should be made an exception and reserved for those who have a demonstrable need to claim benefits before the full retirement age,” the study concluded. But realistically there is real desire to push through politically for this type of policy change.

An alternative way to meet this goal would be simply reworking the angle. Instead of sharing 62 as the “early eligibility age” the emphasis could be placed on age 70 as the “maximum benefit age.”

Wealth management firms should also emphasize the best time to claim benefits because these decisions will inevitably result in declining investment account balances in the short term.

“Providing cover for executives at these firms to make the right financial decisions for their clients, and the right long-term decision for their shareholders, may be helpful at accelerating the adoption of highly efficacious Social Security advice,” the authors concluded.

Check out this guide, 15 Questions to Ask about Your Social Security Benefits, to learn more.

To find out if you are ready for retirement, we can connect you with a retirement specialist for a risk-free assessment. 

Sources

“Retirees Lose $3.4 Trillion by Claiming Social Security Too Early.” InvestmentNews, 28 June 2019, www.investmentnews.com/retirees-lose-3-4-trillion-by-claiming-social-security-too-early-80190.

Securities and advisory services offered through Cetera Advisors LLC, member FINRA, SIPC, broker/dealer and a Registered Investment Adviser. Cetera is under separate ownership from any other named entity.