Claiming Social Security is a big decision that can profoundly impact your benefits for the rest of your life. Unfortunately, many people don’t even know that they are claiming Social Security the wrong way.
Retirees are costing themselves money they can’t afford to lose, and all because they are unaware of some of the most basic facts about their benefits. Here’s where Americans get things so wrong, along with some tips on how to make sure you’re making an informed choice about your own benefits.
Americans are making decisions that massively shrink their Social Security checks
The big mistake that many Americans are making involves claiming Social Security too early, at a sub-optimal time, and missing out on hundreds of thousands of dollars in lifetime benefits because of it.
According to the National Bureau of Economic Research (NBER), the optimum age for over 90% of people to claim Social Security is age 70. Yet, despite that fact, just 10.2% of Americans actually claim at that age. The rest claim much earlier, and that comes at a price.
The median loss in the present value of household lifetime discretionary spending for American workers aged 45 to 62 is a shocking $182,370, which is a very substantial amount of money to leave on the table — especially given that many retirees don’t have enough invested to build a secure retirement without Social Security.
Why are so many Americans claiming Social Security at the wrong time?
There are many reasons why so many Americans choose a suboptimal Social Security claiming age.
One of the biggest issues is that a lot of people don’t know very much about how Social Security works. Specifically, as many as a third of Americans don’t even know when they become eligible to collect their standard benefit without it being reduced by early filing penalties. And only 15% correctly guessed their full retirement age.
Many Americans also believe that if they shrink their benefits with an early claim, their benefits will readjust back up at FRA, when that is simply not the case either. So people end up claiming sooner than they should because they don’t realize how much doing so is going to shrink their benefit, and they don’t know the impact is permanent.
Some people also claim before the optimum age because they want or need to do so to fund an early retirement. And while that is understandable, the cost of that decision remains very high. With proper advanced planning, retirees could live off 401(k) distributions or other investment income while they wait to claim Social Security at 70, even if they retire earlier — but not many people save and invest the right amount to do that.
Sadly, the loss of hundreds of thousands of dollars in Social Security benefits due to a suboptimal claim can make retirement worse for many seniors if they struggle to cover their costs because they have less income than they need. Those who are still working and preparing for retirement should think seriously about working with a financial advisor to create and implement a plan to delay Social Security so this doesn’t happen to them.
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