96% of Americans Are Making This Social Security Mistake

"Mistakes, I've made a few" goes the old Frank Sinatra standard, and all of us have made plenty of them. Some errors, though, can be quite costly and are best avoided if possible. For example, it's best to avoid making mistakes with your Social Security, lest you end up collecting less money from the program than you're entitled to.

Sadly, though, it appears 96% of Americans are making a meaningful mistake regarding Social Security -- by starting to collect their benefits too early.

Image source: Getty Images.

When people start collecting Social Security

One of the first things you need to know in order to make smart Social Security decisions is your "full retirement age." That's the age at which you can start collecting your full Social Security benefits. It's somewhere between 65 and 67, depending on when you were born:

Data source: Social Security Administration. 

Next, know that you can start collecting your benefits as early as age 62 and as late as age 70. For every year beyond your full retirement age that you delay starting to receive benefits, you'll increase the value of your benefits by about 8% -- until you reach age 70, when this bonus for waiting maxes out. So delaying from age 67 to 70 can make your benefit checks about 24% fatter.

Starting to collect earlier than your full retirement age will shrink your checks. If your full retirement age is 67 and you start collecting benefits at age 62, they will be 30% smaller than if you'd waited until your FRA.

So when do people generally start collecting their Social Security benefits? Check out the table below:

Data source: Social Security Administration. 

One-third of people start collecting as soon as they can, with very few waiting until the last year or two. Only 3.7% start collecting at age 70, meaning 96.3% start before then. There are good reasons to start early, but plenty of experts agree the best age to start collecting is age 70. That means that a heck of a lot of retirees are making a mistake.

Let's take a look at why you might start collecting early -- or late.

Why start collecting Social Security early?

There are solid reasons to start collecting early. For example, you might simply need to. Many people end up retiring earlier than planned due to a job loss or health setback. If that happens to you, you might need that income as soon as possible.

On the other hand, you may have saved aggressively for a long time, planning to retire early. If so, the income from Social Security, along with your savings, may be enough to support your early retirement. This makes particularly good sense if you expect to live a shorter-than-average life, perhaps because your family tends to not live that long or you're in poor health.

Another consideration is this: It's a wash, in many ways. The system is designed so that for those who live an average-length life, it doesn't matter when you start collecting. Over your lifetime, you'll receive about the same total benefits.

Image source: Getty Images.

Why start collecting Social Security at 70?

Why would age 70 be a better age to start collecting benefits? There are a handful of good reasons, including:

• You're still working: If you're still working at age 62 and for some years after that -- perhaps because your retirement nest egg is small and you need to keep working -- it makes a lot of sense to delay starting to collect Social Security. If you collect it while working, you may be taxed on that income, and some of it may be withheld, too (though you'll get that money back later in the form of proportionately enlarged checks).
• You can afford to wait: If you're wealthy or simply have enough income that you don't need Social Security income to start at any particular time, you might want to delay so your check amount grows. One strategy that can help you retire a bit earlier while still delaying starting to collect is if you take more money from your other retirement accounts (such as IRAs and/or 401(k)s) in your 60s, enabling you to delay starting Social Security.
• You expect to live a long time: Clearly, if you have many 90-something relatives and you stand a good chance of living a long life, it will be better to collect extra-fat checks throughout your extra-long retirement.
• You have no idea how long you'll live: Most of us really have no idea how long we'll live. According to the Social Security Administration, one out of every three of today's 65-year-olds will live past age 90, while one in seven will live past age 95. Those folks are looking at retirements longer than 25 or 30 years, which is a long period in which to support yourself.
• You're coordinating with a spouse: Waiting to age 70 to claim can be a smart move if you're married and have earned more than your spouse in your working life. That means your checks likely will be bigger than your spouse's, and if you delay collecting yours until age 70, you can maximize your collective benefits. If the two of you need some income sooner, you might start collecting your spouse's benefits first. An added benefit is that when one of you dies, the survivor will get to collect the larger of the benefit checks, maximizing their income.

If those reasons aren't enough, here are a few more, via a report  from United Income titled The Retirement Solution Hiding in Plain Sight. Its researchers used data from the University of Michigan's Health and Retirement Study to run lots of wealth and income simulations on roughly 2,000 households in order to identify the best age for claiming Social Security benefits. They arrived at age 70 and also offered these findings:

• "The average Social Security recipient would receive 9% more income in retirement if they made the financially optimal decision about when to claim [Social Security benefits]."
• "On average, if all retiree households were to have selected the optimal claiming age, they'd have had... about $110,546 per household... or an average of $3,400 a year in extra income."
• "Most retirees will lose wealth in their 60s and early 70s if they choose to optimize Social Security, but will be wealthier in their late 70s through the rest of their lives."
• "Elderly poverty could be cut by nearly 50% if all retirees claimed Social Security at the financially optimal time." Even fewer would end up in poverty "if they earned additional income while they waited to claim Social Security."

Reading up on Social Security may not sound enticing, but the more you know, the savvier decisions you'll make, and that can lead to increased Social Security benefits and many thousands of dollars more in retirement.