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1 Psychological Trick to Help Optimize When You Claim Social Security

By Adam Levy – Sep 16, 2020 at 9:15AM

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Changing the way you think about your retirement benefits can change your decision on when to take them.

Most people start taking their Social Security benefits too early. Just 4% of retirees begin their monthly payments at the optimal time, according to the Bipartisan Research Center.

For most retirees in good health, the best age to claim Social Security benefits is age 70. Waiting to claim Social Security provides a guaranteed inflation-adjusted return that you won't find with any other investment vehicle.

There's a big reason many people claim early, and it has to do with how Social Security benefits are framed. The phrase "it's not what you say, it's how you say it," is actually very true in decision science. Changing the frame can help more retirees make the more optimal choice of waiting until 70 to claim Social Security benefits.

Social Security cards on top of a pile of banknotes.

Image source: Getty Images.

Paying to accelerate your benefits

People are impatient.

Would you rather have $100 now or $110 next week? Most people will say they want $100 now.

But since you're a smart, Foolish investor, you take a second to do the math, and you realize that waiting a week to gain 10% is an incredible deal. And rationally, taking $110 next week is the financially optimal choice.

One way to reframe this question is to say you have a $110 bond that matures in one week. You can pay a $10 penalty to cash it out now, netting $100. Which do you choose now? Same question, different perspective on the answer.

The reframe invokes loss aversion. That's the idea that people dislike losing a certain amount of money more than they prefer to gain the same amount. There are rational reasons for loss aversion, but as seen in the example above, the phenomenon often defies rationality.

Apply the same reframing to Social Security benefits

Retirees show a strong preference toward two retirement ages: 62, the earliest eligible age to claim Social Security, and their full retirement age, which currently ranges from 66 to 67. In fact, researchers found that as the full retirement age increased from 65 to 66, most employees changed their expected retirement age to their designated full retirement age because they were anchored to that number.

People aren't just anchored to those ages, but to the amount of their Social Security benefits. "Full retirement age is when I get the full benefits of Social Security," the thinking goes. They can receive more if they delay claiming Social Security, but they're not giving up the full value of their benefits.

But retirees claiming early, and even those claiming at their full retirement age, are actually giving up a lot. Researcher Wade Pfau estimated Social Security offers a 3.2% real rate of return for single males between the ages of 62 and 70. Women see an even greater return, 4%, and married couples achieve a 5.2% return.

Is retiring at 62 worth giving up one-third of your and your spouse's lifetime benefits? That's exactly the price you're paying to accelerate your retirement benefits.

Most people will now say no. Considering what you're giving up makes you weigh it more heavily than if you saw it as a potential gain. So, changing the frame for Social Security that 70 is when you can receive your full benefits will help you wait until that age to start claiming. 

The research backs that up. Two sets of survey respondents were asked their preferred retirement age, 65 or 68. In one survey, age-68 benefits were described as a gain over the age-65 benefits. In the other survey, the age-65 benefits were described as a loss versus the age-68 benefits. All the numbers remained the same. Still, 37% preferred to retire at age 68 in the first survey versus 57% in the second survey.

It's not what you say, it's how you say it. 

Claiming at 70 isn't for everyone, but it's probably for you

There are several valid reasons to claim Social Security benefits before 70.

That said, about 57% of people would maximize their lifetime wealth by claiming Social Security benefits at age 70, according to a study from United Income. The fact that less than 4% actually wait that long is indicative that people generally make poor and impatient decisions. 

On the other hand, claiming before age 64 is the optimal choice for about 6.5% of people, but over 70% of retirees apply in their first three years of eligibility.

While it's impossible to know for certain how long you'll live in order to maximize your benefits, age 70 is usually the best bet you can make. And considering claiming at age 70 as the full benefit and anything else as accepting a loss can help force you to wait.

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