Most retirees in the United States rely on Social Security to provide some of their income. Often, they rely on their benefits for a large portion of it. That’s why it’s essential to make informed decisions about retirement benefits.
In particular, there is one Social Security decision that could be worth well over $100,000. Unfortunately, many retirees don’t understand the implications of their choice, and they end up making the wrong one. This comes at a huge cost. If you don’t want to be one of them, here’s what you need to know.
This Social Security decision could be worth a fortune
The biggest Social Security decision that you will make has to do with exactly when you claim your retirement benefits.
Many seniors claim as soon as they become eligible, when they turn 62, often without knowing the implications of an early claim. This happens, in part, because people don’t know when their full retirement age is (over half think it’s 65). It also happens because many people think their benefits will increase at FRA if they claim early, even though the benefit reduction for an early claim is permanent.
The problem is, if you claim at 62, you can shrink your standard payment by 30% compared to the amount you’d collect if you claimed it at your full retirement age. If you were on track for $2,000, for example, you’d get $1,400 instead. This would mean missing out on $600 in monthly benefits for potentially decades of retirement.
Not only that, but a claim at 62 means you’re entirely giving up the chance to earn delayed retirement credits that become available to you if you wait beyond your FRA to start payments for the first time. Delayed retirement credits can be earned each month you wait from FRA to 70, so if your full retirement age is 67, you could earn up to three years’ worth of credits and could increase your check by 24%.
The impact of claiming at 70 is impressive, with a $2,000 check growing to $2,480 — over $1,000 more every single month than the $1,400 you’d have collected if you started at 62.
Americans are leaving over $100,000 on the table
While it’s clear that monthly benefits are higher when you wait, many Americans opt out of delaying because they don’t want to give up years of missed income. If you wait from 62 to 70 to claim, that’s eight years you could have collected benefits but didn’t. This may feel like you’re passing up too much money.
In reality, though, the data is pretty clear that a delay often pays off in terms of more lifetime income as well as monthly income. The National Bureau of Economic Research found that just over 10% of people actually claimed benefits at age 70, despite it being the right age for around 90% of people to start their checks. Those claiming at a suboptimal age were found to cost themselves an average of $182,370. This was the median loss in the present value of household lifetime discretionary spending.
Leaving so much money on the table is not ideal for retirees, so if you are deciding when to claim Social Security benefits and are able to delay, you’ll want to make the decision about when to claim Social Security very carefully. If you’re claiming before 70, you should be aware of what you’re passing up and really take the time to think about whether that early claim is worth missing out on so much.
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