For years now, there’s been lots of talk about what happens if you claim Social Security benefits before full retirement age (FRA) or even waiting until the maximum age of 70. Claiming early means you’ll receive less money, permanently, than if you waited. In spite of the warnings, only 4% of retirees wait until 70 to claim benefits and that costs trillions of dollars of potential retirement income.
Every year, the Social Security Administration pays more than $1 trillion to more than 65 million people, which accounts for about one-third of all retirement income. Approximately half of retirees say that more than 50% of their income comes from Social Security, and a third say it’s more than 90%.
A study conducted by United Income, The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions, puts a pencil to the negative financial impact on workers who claim Social Security benefits before full retirement age. Here are some of their conclusions.
- Retirees will collectively lose $3.4 trillion in potential income that they could spend during their retirement because they claimed Social Security at a financially sub-optimal time, or an average of $111,000 per household. The average Social Security recipient would receive 9 percent more income in retirement if they made the financially optimal decision about when to claim this retirement benefit.
- Current retirees will collectively lose an estimated $2.1 trillion in wealth because they made the sub-optimal decision about when to claim Social Security, or an average of $68,000 per household. Most retirees will lose wealth in their 60s and early 70s if they choose to optimize Social Security, but will be wealthier in their late 70s through the rest of their lives.
- Only 4 percent of retirees make the financially optimal decision about when to claim Social Security. About 57 percent of retirees would build more wealth through their life if they waited to claim until they were 70 years old (when only 4 percent of retirees currently claim), while only 6.5 percent of retirees would have more wealth if they claimed prior to turning 64 (when over 70 percent of retirees currently claim benefits).
- About 21 percent of those at risk of not affording retirement (or having enough income to cover their expected cost of living) would see an improvement in their chances if they claimed Social Security at the optimal time. Among those retirees at risk that start with a greater than 10 percent chance of affording retirement, 95 percent see their chances of affording retirement improve by an average of 28 percent.
- Elderly poverty could be cut by nearly 50 percent if all retirees claimed Social Security at the financially optimal time. In particular, about 13 percent of people over the age of 70 are expected to live in poverty at some point, which is estimated to fall to 7 percent if retirees had claimed Social Security at the optimal time –a rate that could potentially fall even further if they earned additional income while they waited to claim Social Security.
The report found that virtually no retirees are making the financially optimal decision about Social Security. That could be, in part, due to a lack of willingness by retirees to sacrifice on the front end of retirement in order to have a better outcome later on. Therefore, it’s unlikely more retirees will choose to postpone claiming Social Security benefits and instead take the bird in the hand, claiming at 62, which reduces the Social Security payout by 25% for the rest of a recipient’s life.