Work hard. Retire. Collect your Social Security benefits. Millions of Americans have followed and will follow this path.
But it's a path with some forks in the road. Your decisions could significantly affect how much you receive in benefits during your retirement years. There's one move that could even boost your Social Security benefits by 76%.
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The most important Social Security decision
Without question, the most important decision involving Social Security is when to begin receiving retirement benefits. For individuals born in 1960 or later, your full retirement age (sometimes called normal retirement age) is 67.
But you don't have to wait until age 67 to begin collecting Social Security retirement benefits. The federal program allows you to receive benefits as early as age 62, assuming you've worked for at least 10 years.
Around one out of three Americans opt to start receiving Social Security retirement benefits at age 62. That's lower than it's been in the past. In 2005, 50% of men and 54% of women signed up for Social Security benefits at the earliest age possible.
However, there's another alternative, a path few take: Wait until age 70 to begin receiving Social security retirement benefits. Only 6% of Americans hold off on filing for Social Security. But it's a move that can dramatically boost your lifetime benefits.
The 76% solution
David Altig with the Federal Reserve Bank of Atlanta, Boston University economics professor Laurence Kotlikoff, and Opendoor research scientist Victor Yifan Ye set out to determine just how much money Americans sacrifice by claiming Social Security benefits early. What they found might surprise you.
The National Bureau of Economic Research (NBER) published a paper by the three economists in November 2022. Altig, Kotlikoff, and Ye calculated that delaying Social Security retirement benefits until age 70 increases the average amount an individual will receive over a lifetime by 76%, adjusted for inflation, compared to receiving Social Security at age 62.
Why is there such a huge difference in benefits between filing for Social Security at age 62 versus age 70? It's a carrot-and-stick scenario.
The stick is that Social Security penalizes early retirement by reducing benefits. For example, if you reach age 62 this year and file for Social Security, your benefits will be roughly 30% lower than if you waited until your full retirement age of 67.
The carrot is that Social Security provides a financial incentive for delaying filing for benefits. Your benefits will increase by 8% each year you hold off on filing for Social Security between your full retirement age and age 70.
When filing early for Social Security makes sense
Over 90% of Americans would be better off financially by waiting until age 70 to begin receiving Social Security retirement benefits, based on the analysis performed by Altig, Kotlikoff, and Ye. So why do so few make this decision?
The No. 1 reason to claim Social Security at age 62 is that you simply don't have another choice. If you lose your job or have serious health problems, claiming Social Security benefits might be your only viable option for making ends meet.
There are other scenarios in which filing for Social Security early could make sense. For example, perhaps you really want to change jobs later in life but can't afford to do so without receiving some supplemental income.
Still, the vast majority of Americans could significantly increase their retirement income by waiting until age 70 to file for Social Security. Patience could pay off in a big way.
