Almost all American retirees claim Social Security at the wrong time, a new report estimates, which means they will miss out on a collective $3.4 trillion in benefits before they die.
While they can tap their benefits as early as age 62, retirees could boost the size of their checks for every year they wait until age 70, when the maximum benefit accrues. The advantage in waiting is substantial: A person eligible for a $725 monthly check at 62 could get a $1,280 check if they wait to start at age 70.
United Income, a money management firm that provides financial advice to retirees, teamed up with former Social Security officials to simulate retiree decisions on when to claim benefits, along with factors that include income, wealth, taxes, health status and longevity. Their analysis, published Friday, found that 96% of retirees choose the wrong year to tap Social Security.
“People are pretty much doing the opposite of what they should be doing,” said Matt Fellowes, founder and chief executive officer of United Income and co-author of the paper.
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When to take Social Security is a key decision for America’s elderly, for whom the program has become a critical safety net. About half of older Americans get most of their income from the program.
Unlike investments and other sources of retirement income, Social Security benefits are guaranteed to keep up with inflation and last for life. That’s important when half of all 65-year-old American women can expect to live past age 86, according to Social Security estimates. The average life expectancy for U.S. men who are currently 65 is age 84.
The report is based on about 2,000 households that participated in a long-running University of Michigan study. To calculate ideal filing years, United Income estimated retirees’ spending and longevity and ran about 500,000 possible scenarios for each participant, including various market conditions, for a total of about 1.1 billion simulations.
Only 4% of U.S. retirees are waiting until age 70 to claim Social Security; some 57% should be doing so, the report calculated. Meanwhile, more than 70% start taking checks before turning 64, a time when—ideally—only 6.5% of retirees should be cashing checks. The lost income from these less-than-optimal decisions amounts to about $111,000 per household, the researchers estimate.
The United Income analysis finds little rhyme or reason in Americans’ claiming decisions. If you’re healthy and expect to live a long time, you should maximize benefits received late in life by delaying. But the report finds that people don’t do this: Those who ended up dying before 75 were just as likely to have claimed early as those who died after 85. (There is a way to claim benefits, then suspend them until later, but it’s kind of complicated.)
Why are so many people getting it wrong? Some retirees might not realize it, but by tapping Social Security at 62 or 63, they’re locking in that lower benefit amount for the rest of their lives. Social Security’s rules are also complicated, particularly for married people, and the ideal strategy isn’t always obvious. Four years ago, a 384-page book on Social Security-claiming strategies became an unexpected bestseller.
What about the theory that, in the end, you’ll probably get the same amount, no matter what you do? That’s not true for most people, especially since people are living longer. Other retirement experts have done the math and determined that, assuming you’re in reasonable health and can afford to wait, you should. That’s especially true for women, who are likelier to live longer. Then again, it’s not true for people who might die earlier.