Most people nearing retirement don’t realize what a critical decision they have to make when it comes to claiming their Social Security benefits.
It’s all about timing, according to a report by Sunnyvale, Calif.-based Financial Engines. With thousands of claiming strategies out there to choose from, it isn’t all that surprising that people don’t understand their options. According to a survey by Financial Engines and Matthew Greenwald and Associates, 25 percent of respondents were confident in their ability to make a good claiming decision for their household – at the beginning of the survey.
By the end of the survey, one-third acknowledged that claiming Social Security is more complicated than they thought and four in 10 were interested in getting help.
“As people get close [to retirement], the problems they face become more complex,” said Chris Jones, chief investment officer and executive vice president of investment management for Financial Engines. “Social Security forms the bedrock foundation of most retirees’ retirement income.”
He pointed out that Social Security covers 93 percent of Americans who have access to it and represents a significant portion of their income.
And although respondents were pretty sure they knew how to claim Social Security, by the end of the survey it was clear that “people don’t know much at all about how Social Security works,” Jones said. “People are over-confident when it comes to Social Security. They think they know what they are doing, but they really don’t.”
The claiming process is very complex and the decision that is right for one person may not be right for another. It depends on many variables, including marital status, disability, if someone is widowed or has dependents.
“For a typical married couple, there are more than 8,000 claiming strategies when determining when to take your benefits,” Jones said. “That is overwhelming to most individuals. Very few people recognize there is a decision to be made.” The majority of Americans begin taking Social Security when they turn 62 or within a couple of months of leaving work.
“They think taking it is synonymous with stopping working. It is standard practice. However the system is providing opportunities that are much better than that. It boils down to a simple concept. It pays to delay,” he said. “By delaying the start date of your Social Security you receive a higher benefit amount. Each year you defer or delay your Social Security start date between 62 and 70, your benefit amount goes up between 6 to 8 percent per year and grows with inflation from that point forward.”
People who delay taking their benefits until age 70 will see 72 percent higher monthly payments from the Social Security Administration. Those higher payments increase with inflation over time.
“That is a really good deal in today’s market,” he said.
Many people don’t realize what they are potentially leaving on the table by claiming early. For a typical individual, that could be as much as $100,000 in lifetime benefits they are forgoing by taking their benefits early. For married couples, that could mean they are leaving $250,000 in lifetime benefits on the table.
“Those numbers are quite comparable to the average size of a 401(k) plan that people in this cohort have. We are talking about comparable amounts of money to what people have saved in their entire career in a 401(k), especially for those in the lower end of the income spectrum,” Jones said.
According to the Social Security Administration Fact Sheets, about one in four married couples and nearly half of unmarried people rely on Social Security for 90 percent or more of their retirement income.
Through its survey, Financial Engines found that a little guidance and help can go a long way toward helping workers make the right decisions.
More than half of people who haven’t yet claimed Social Security were encouraged to delay after watching a short video or talking to someone about it.
“In both cases, people would typically increase their claiming age for a year based on generic communications and were more interested in personalized guidance to come up with a strategy that was appropriate for their household. People are interested. They care about this stuff. It is relevant.” Jones added that when it comes to retirement planning, there is a lot of emotion, guilt and anxiety about these decisions. Some people haven’t done a good job saving for retirement. They never paid attention to these decisions during their working years.
Individuals in their 50s and 60s feel ill-prepared for what retirement will bring.
There is a lot of uncertainty over how long people can expect to live in retirement. The bulk of respondents to the Financial Engines survey believed they would retire at a median age of 65 and live to be 85. Assessments of personal health and longevity have a major influence on the decision about when to claim Social Security.
More than two out of three Americans surveyed who have yet to claim Social Security suggest they would find a variety of claiming resources useful, including a website with articles and information and an online service that would show optimal claiming ages based on information entered.
The majority of people surveyed, who haven’t claimed Social Security benefits yet, view the decision to retire and the decision about when to claim Social Security as the same decision. Only 22 percent of those thought retiring and claiming were two totally separate decisions.
Many believe that delaying when they claim Social Security will force them to work longer to afford the delay.
Fifty-four percent of those surveyed believe that covering basic living expenses will be an important driver of their decision about when to claim Social Security benefits. Only 25 percent predict that their Social Security retirement benefits will be their primary source of income in retirement. Non-claimants also are more attuned to their 401(k)s and other retirement accounts.
Social Security will mean the most to people earning minimum wage.
“For that population, Social Security is probably going to replace 70 percent of their income, which is not going to improve their socioeconomics. Retirement is not going to improve that, but at least the Social Security safety net will be wider for those folks, which in turn means they don’t necessarily need to accumulate other money,” said Phyllis Klein, senior director of the Consulting Research Group at CAPTRUST Financial Advisors.