Many decisions you'll make at retirement will impact your financial situation later in life. One of the most important is when you claim Social Security retirement benefits. You can start getting your checks when you're just 62 years old, but you also have the option to wait until as late as 70 -- and the longer you wait, the higher the amount of your monthly check.
For many retirees, claiming these benefits ASAP seems to be the way to go. In fact, 62 is the most popular age by far for both men and women to start their benefits. A whopping 40% of women and 35% of men get their checks as soon they're eligible, compared with just 7% of women and 5% of men who delay until 70.
While on the surface it may make sense to get your money ASAP, especially with the buying power of benefits eroding, recent research from Capital One United Income revealed that those who don't wait could end up costing themselves a small fortune. In fact, while Capital One's research is clear that claiming at 70 isn't the right choice for everyone, it revealed that as many as 57% of retirees would build more wealth over their lifetimes by waiting as long as possible.
Most retirees would benefit from waiting until 70 to start their benefits
Despite the fact Social Security is one of the most important sources of retirement income, just 4% of retirees make the financially optimal choice when it comes to the age they start their benefits, according to Capital One's research.
Figuring out the ideal age to begin getting checks is definitely not easy, as there are many factors in place. But for those playing the odds, it's clear that waiting until 70 usually pays off. In fact, although more than 70% of retirees now claim benefits before their 64th birthdays, only 6.5% of people who claim their benefits so young end up with the maximum lifetime wealth. This is in stark contrast to the 57% of seniors who would end up better off had they waited until their seventh decade.
Claiming early and making the suboptimal benefit choice can have dire consequences, including making life a lot harder late in retirement. In fact, while 13% of retirees over 70 are expected to end up living in poverty, just 7% of seniors would be consigned to this fate if they just waited to claim benefits.
Why does waiting until 70 help so many retirees maximize their wealth?
Under the Social Security benefits formula, those who file for benefits at full retirement age (between 66 and 67 depending on birth year) receive a standard benefit based on their inflation-adjusted earnings in the 35 years they earned the most. Anyone who files prior to full retirement age is subject to monthly early file penalties that reduce the size of their checks, while those who delay can raise their checks for each month they wait by earning delayed retirement credits.
These delayed retirement credits can be earned until you hit age 70 -- so waiting to claim until that age enables you to grow the size of your monthly check as much as possible.
Theoretically, this shouldn't matter because the system is designed so you get fewer checks, and you should get the same amount of lifetime income as someone who claimed early and got smaller checks but received more of them. In reality, however, many people live long enough not just to break even but to end up with more lifetime income due to delaying benefits.
In fact, as the data shows, close to 6 in 10 people end up better off if they avoid early filing penalties and max out their delayed retirement credits, rather than accepting a smaller benefit starting at a younger age.
Is waiting until 70 right for you?
It's easy to look at the data and say that close to 57% of retirees would end up better off by waiting until 70. Without looking more closely at the study's parameters, though, it's harder to figure out whether you'd be among them -- or be part of the other 43%.
The problem is, without knowing how long you're going to live or what's going to happen to Social Security in the future, you can't really know the optimum benefits claiming strategy in advance.
The best you can do is consider your likely life expectancy based on your current health and family health history, calculate your break-even point, and make the most informed decision possible. As long as you make an informed choice with the knowledge of how your age at claiming impacts your benefits, you'll hopefully end up with the highest benefit possible.