Most people don't make the best choice when it comes to claiming Social Security benefits.
You have the option to start receiving retirement income from Social Security as early as age 62, or to wait longer and raise the size of your check for each additional year of delay until you hit 70. Your decision about when to claim your benefits is called a Social Security claiming strategy and just 4% of retirees choose the optimal one, according to a recent survey from United Income.
Unfortunately, the costs of claiming benefits at the wrong time is really substantial. In fact, retirees are losing out on as much as $3.4 trillion in potential income because of it.
Here's how much money you could miss out on
According to United Income's research, those who claim Social Security at the wrong time pay a big price -- an average of $111,000 less money for each American household.
In fact, the average Social Security retiree would have 9% more in retirement income if they'd made a different claiming decision while more than half of all retirees would see their income later in life (in their 70s and 80s) rise by more than a quarter.
This not only comes at a big cost to individual seniors and their families, but it affects society as a whole. Poverty among the elderly could be cut in half if all retirees claimed their benefits at the optimal time, reducing the need for other government benefits and boosting spending power among the growing senior population.
How can you optimize your Social Security claiming strategy?
United Income determined that most retirees would likely have been better off waiting to claim Social Security benefits until age 70, with around 57% of seniors building more wealth with this option compared to 6.5% who'd have more lifetime wealth if they claimed before the age of 64.
But while claiming late results in larger checks and is the right choice for the majority, it's not the right choice for everyone. The key factors that you'd need to consider to find the optimum strategy for you include:
- Your likely life expectancy: Social Security is structured so it theoretically offers the same lifetime income regardless of when you start your benefits, with those who claim early getting smaller checks for a longer time and those who delay receiving fewer checks but larger ones. However, those who outlive their projected life expectancy can maximize their income by delaying benefits while people who pass away early would've been better off getting their money ASAP. If you have health issues or a family history of early death, you'll likely want to make a different choice than if you're the picture of health and everyone in your family lived to 100.
- Your spouse's situation: If you are the higher earner, claiming your benefits early could cause your spouse to get lower survivor benefits, while delaying could maximize the income available to your widow after you pass on. If you don't want to leave your spouse in the lurch and you want to get the maximum Social Security money as a couple, delaying until age 70 makes sense.
- Your ability to delay benefits: While it may be financially smarter for most people to wait, it's not always economically feasible. If you can't find a job and need income from Social Security to support you and avoid draining your retirement nest egg, you may have to claim early even if doing so means you get less lifetime income.
It can take time, effort, and sometimes professional advice to make the optimum claiming decision. But with retirees losing out on $3.4 trillion, there's 3.4 trillion reasons why making the effort is well worth it.