Recently we learned about Social Security’s long-term solvency challenges, and why Millennials may want to reduce their planned financial dependency on this government program. However, the availability of these benefits for older Americans is relatively certain, and nearly one in four Baby Boomers recently surveyed by Transamerica said that they expect Social Security to be their primary source of income in old age.
Any of these individuals yet to retire should give a lot of thought to when they want to begin collecting their benefits because a person can start claiming Social Security as early as age 62 but what they receive from the government will as a result be significantly reduced. To get their full benefit, Boomers must instead wait until around their 66th to 67th birthday, depending on the year they were born. Many Americans, though, begin claiming Social Security as soon as possible, and research suggests that one reason why people rush to receive their benefits is that they fear they will be losing money if they do not start collecting immediately.
In fact, Americans with the greatest aversion to losses were found to have the highest likelihood of claiming their Social Security benefits on their 62nd birthday. Major financial decisions should never be made based on fear, and delaying the age at which you claim Social Security benefits can help protect both you and your spouse from a more substantial loss down the road, e.g. inadequate retirement income when you are too old or sick to work. Fortunately, an earlier study from the Center for Retirement Research (CRR) at Boston College suggests that more Americans are waiting longer to claim their Social Security benefits.
Specifically, 36 percent of men and 40 percent of women in 2013 who turned 62 that year claimed their retirement benefits, a sharp decline from 56 percent of male and 63 percent of female 62-year-olds in the mid-1990s. This shift is consistent with the recent gains seen in labor force participation at older ages and the rise in the average retirement age. Medical innovations and broad standard of living improvements help explain why more Americans are able to continue working well past the traditional retirement age, but regardless of why people delay retirement, doing so can greatly improve the benefit they receive from the government.
For example, any Americans born between 1943 and 1954 can receive 100 percent of their Social Security benefit if they wait until their 66th birthday to start claiming. However, each additional year of delay will increase their benefit by 8 percentage points up to 132 percent at age 70. Another reason to wait to start claiming Social Security is because the benefit is based on your highest 35 years of earnings. Since people tend to make more money later in life, a few extra years of postponing retirement could help replace one’s younger, lowest-earning years in the calculation and result in a much larger Social Security payout.
Another CRR paper even suggested that every additional dollar in late-career earnings could increase your Social Security benefit by 15 to 90 cents. Further, the study estimated that after factoring in the boost from late-career earnings, women (men) who delay retirement until their 70th birthday could increase their benefit by 88 percent (82 percent) over what they would receive at age 62. There are of course a few arguments for not waiting, which is why every American should work with a professional financial advisor to help determine what benefit their planned retirement age will deliver, and whether it will be able to provide them with their desired standard of living in old age.
Sources: U.S. SSA, NBER, CNBC, Boston College (CRR)
Post author: Charles Couch