Nine in 10 working Americans say they plan to ignore one of the most common pieces of financial advice about Social Security: waiting until age 70 to claim benefits, which ensures higher monthly payments, according to a new study from investment firm Schroders.
Social Security allows employees to claim their benefits as soon as they turn 62, years before the so-called “full retirement age,” which now stands at 67. But claiming Social Security early has a tradeoff — it lowers your monthly payment by about 30%, with those lower benefits locked in for the rest of your life.
By contrast, delaying Social Security until age 70 results in a roughly 24% higher monthly payment than if you claimed benefits at age 67 — also locked in as long you’re collecting benefits. As a result, financial experts often recommend that seniors hold off as long as they can, with one study finding that filing early for benefits can cost $182,000 in foregone payments.
The Schroders survey suggests that many Americans who haven’t yet retired aren’t buying that advice. In the survey of 1,500 adults, most respondents said they understand the trade-offs of claiming early, but only 10% plan to wait until age 70, while 44% expect to file for benefits before they reach full retirement age.
Social Security provides an online calculator that lets users plug in their birthdate, then calculate the percentage difference in their monthly payment based on the age at which they plan to claim the retirement benefit.
Another new study, released Tuesday by the Allianz Center for the Future of Retirement, finds that a majority of Americans say they don’t know much about Social Security or how it will fit into their retirement plan. And about 1 in 5 believe Social Security will provide all the retirement income they need, even though it generally replaces only 40% of a worker’s wages when they retire, the study found.
“Not an oversight”
The disconnect illustrates the financial reality facing most workers, Deb Boyden, head of U.S. defined contribution at Schroders, told CBS News.
“The decision to sacrifice extra Social Security income is not an oversight for most Americans,” she said. “According to our research, 70% of Americans are aware that waiting longer to claim Social Security leads to higher payments, and yet so few are willing to hold off.”
Many retirees are facing a shortfall in their own retirement savings, a financial gap that’s been well documented as a growing share of Americans live paycheck to paycheck. Many workers “need the income generated by Social Security to meet their expenses immediately upon retiring,” Boyden noted.
Why many seniors start Social Security early
While the advice to wait as long as possible to claim Social Security makes financial sense, it also doesn’t fully account for people’s individual needs and circumstances. Many older adults claim benefits early out of financial necessity, while others may do so because health issues or chronic conditions lead them to expect a shorter-than-average lifespan.
Some seniors also weigh the so-called break-even point — the age at which the total money you’ve collected from starting benefits early equals what you would have collected if you had delayed claiming Social Security in oder to get a higher monthly check. In other words, someone who starts collecting at 62 will have banked eight years of benefits, as opposed to claiming at age 70.
Based on today’s average monthly Social Security benefit of $2,000, that early claimer would receive a reduced benefit of about $1,400 a month. Over the following eight years, that would amount to $134,400 in total benefits received by the time the person started collecting Social Security at age 70.
By filing for benefits at 70, that individual would receive a monthly payment $2,480, but it would take 10.4 years for the extra amount in their monthly payment to surpass the $134,400 that an early filer collected in the prior eight years. That makes the break-even age about 80.4 years old.
The upshot: Some seniors, especially those with health issues, might decide they’re unlikely to reach that break-even age and opt to have money in their pockets earlier rather than waiting to start collecting Social Security.
The average life expectancy for a 62-year-old man today is an additional 22 years, or about age 83.6, while a woman the same age is expected to live to around 86.5, according to the Social Security Administration.
Concerns about Social Security’s future
There’s another reason why many Americans plan on claiming their Social Security benefits before reaching full retirement age, she added. That’s due to concerns about the future of Social Security, which is fueling concerns that “the money may not be there if they wait,” Boyden said.
Social Security is indeed facing a financial crunch, with an aging U.S. population resulting in its payments now outpacing contributions from workers. Without changes to the program, that will result in its trust funds becoming insolvent by 2034, according to the most recent calculation from the Social Security Board of Trustees.
Yet many people wrongly believe that means Social Security will halt payments if the trust funds become insolvent. Payments would continue in such an event, but benefits would be reduced by about 20% — a potentially major financial hit to the program’s more than 70 million beneficiaries.
Still, there are ways lawmakers can shore up the program, such as by raising the income cap on Social Security taxes, which stands at $176,100, according to experts. Earnings over that amount are exempt from the payroll tax, which funds Social Security.
In the meantime, non-retired Americans told Schroders they believe they need $5,032 in monthly income to retire comfortably. But today’s retirees on average generate about $3,250 in monthly retirement income, Boyden said, adding that the gap signals the need to help workers plan better for retirement.
A recent analysis from Goldman Sachs found three-quarters of younger working Americans say they’re struggling to save for retirement because basic expenses such as housing are eating up a bigger share of their income compared with prior generations.
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