Social Security isn't just an income stream that retired workers look forward to receiving during their golden years. For many, it's a financial foundation that makes up a good chunk of their annual income. The Social Security Administration (SSA) notes that 62% of elderly beneficiaries rely on their monthly stipend to account for at least half of their income. Meanwhile, an analysis from the Center on Budget and Policy Priorities estimates that without Social Security income, senior poverty rates would be almost five times as high (above 40%).
Given how important Social Security income is to a majority of seniors, your claiming decision (i.e., the age at which you decide to begin receiving Social Security benefits) can have a major and lasting impact on your ability to stay above the federal poverty line during retirement. While your earnings history and length of work history do have bearing on your monthly payment -- the SSA takes into account the average of your 35 highest-earning, inflation-adjusted years -- your claiming age can dramatically impact what you'll receive.
For those unfamiliar with Social Security, eligible beneficiaries can begin receiving a monthly payout at age 62, or any point thereafter. But there's a pretty big dangling carrot for those who are patient. Benefits grow at approximately 8% for each year that you hold off on signing up, beginning at age 62 and ending at age 70. All things being equal, such as work and earnings history, an individual enrolling at age 70 could net a monthly benefit up to 76% higher than that of a person enrolling at age 62.
Could a poor claiming strategy cost you $300,000 over your lifetime?
For many seniors, that 76% difference wouldn't be pocket change. But according to Ron Carson, the founder and CEO Carson Wealth Management Group, it could be a difference of up to $300,000 over a person's lifetime. Here's what Carson had to say about Social Security claiming decisions in a recent interview with CNBC: "This is the single-largest asset many consumers have, and they're not optimizing it, they're not getting the maximum income from it. The difference between your best and your worst option may in fact be up to $300,000 [over your lifetime]."
According to Carson, retirees are leaving an estimated $10 billion in Social Security benefits unclaimed each year because they haven't optimized their claiming strategy. In other words, most are claiming benefits too early, or possibly missing valuable spousal benefits.
Data from the Center for Retirement Research (CRR) at Boston College would tend to support Carson's statement. Based on data collected in 2013, the CRR finds that approximately 45% of eligible beneficiaries claim at age 62, thus reducing their benefit on a permanent basis. That's not exactly great news, considering that more than three out of five seniors rely on Social Security for at least half of their annual income.
By comparison, only around a third wait until their full retirement age to claim benefits, and just 3% wait until age 70. Your full retirement age is the point at which you're eligible to receive 100% of your retirement benefit, as determined by your birth year. Waiting until after your full retirement age to sign up can actually increase your payout above and beyond your full retirement age benefit.
The wrong claiming strategy would likely cost the average retiree less than $50,000
However, Carson's example essentially highlights what could happen if a wealthy individual who qualified for the maximum retirement benefit made the worst possible claiming decision. It fails to take two pretty important factors into account.
First, it's not looking at what would happen to the average American, which is what I think most people would care about. Most seniors reliant on Social Security haven't made enough for a minimum of 35 years to max out what they'll be paid by the SSA. For instance, you'd need $128,700 in income next year to hit the maximum taxable earnings cap, which is where Social Security's payroll tax is no longer applied to your earned income. Now imagine hitting that level on an inflation-adjusted basis for 35 years. Chances are that most of the 3% of seniors waiting until age 70 to enroll aren't eligible for the maximum monthly payout.
Back in April, yours truly put together an analysis of lifetime benefits for seniors claiming at ages 62 through 70 with an average retired worker payout of nearly $1,364 a month (as of September 2017, it's now $1,372 a month). By age 85, those who had waited until age 70 to claim had earned close to $50,000 more over their lifetime than those who claimed as early as possible. Yes, that's a lot of lifetime benefits to be giving up by claiming early, but it's nowhere near the $300,000 cited by Carson.
What's more, the average person lives to be 78.8 years old, according to the Centers for Disease Control and Prevention, which just happens to be the rough inflection point where claiming early, late, or somewhere in the middle tends to converge as a similar lifetime payout.
The second factor Carson ignores is that not all seniors have the option of waiting until age 70, nor is it necessarily prudent to do so. If you have a chronic health condition, or your immediate family has a history of passing away before the average life expectancy, then claiming earlier would probably make more sense. Likewise, if you're a significantly lower-earning spouse, claiming early and generating some extra income for the household while your higher-earning spouse allows his or her benefit to grow at approximately 8% a year makes a lot of sense.
Don't get me wrong -- having the wrong claiming strategy can and will cost you. But thankfully, the chances of it costing you up to $300,000 over your lifetime are practically slim to none.
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