There are many things to consider when planning for retirement, but one of the most difficult decisions is deciding when to claim Social Security. Retirees can begin claiming Social Security benefits as soon as age 62 and as late as age 70. The caveat is that over this eight year period, the longer one waits to claim, the higher their benefits will be.
However, even though delaying benefits until age 70 allows one to collect their maximum Social Security benefit, most retirees won't wait that long.
Most people expect to claim benefits early
The Social Security Administration sets a baseline at one's full retirement age (FRA). This is the age at which retirees can receive their full benefit (also known as the primary insurance amount), which is based on several factors, including the number of years they worked and how much they earned throughout their career.
Those born in 1960 or later, for example, will reach FRA at 67. Filing for Social Security before FRA means one's benefits are reduced by a small percentage for every month they're short of reaching that milestone. So if a retiree claims Social Security at age 62, they will see their benefits reduced by a whopping 30% compared to what they'd collect at 67.
The silver lining here is that retirees that delay claiming until after FRA will see their benefits increase by a small percentage each month. For the same retiree with a FRA of 67, they can increase their benefits up to 24% by waiting until age 70.
Image source: Getty Images.
The financial incentive to wait as long as possible before filing for benefits is clear, but 44% of non-retirees said they plan to claim Social Security prior to age 67, according to a recent study from the asset and wealth management firm Schroders.
The same study says that just 10% plan to wait until age 70. Now, one might assume that many retirees simply do not understand how timing affects the amount they'll receive from the program. However, the study found that 70% of respondents said they understood that delaying benefits would lead to bigger Social Security checks.
With that in mind, here are the top four reasons survey respondents gave for why they plan to claim benefits before age 70:
- 37% of survey respondents say they want to access the money as soon as possible.
- 36% of survey respondents say they are concerned Social Security may run out of money or stop making payments.
- 34% of survey respondents say they think they will need the money for regular income.
- 15% of survey respondents say they were advised to take it earlier than age 70.
All are logical answers, although those worried about the solvency of the Social Security program should understand the main financial concern for the program right now revolves around the Social Security trust funds. The trust funds are essentially rainy day funds for the program. If and when these funds run dry, annual Social Security payroll taxes will still be able to fund 81% of scheduled benefits in 2034. That potential 19% reduction is certainly a big deal, but believing the program would simply stop making payments is incorrect.
Furthermore, I do think Congress will eventually come up with a solution to fix the shortfall, even if it's not until the very last minute. Tens of millions of Americans rely on Social Security for primary or supplementary income in retirement, so letting benefits experience a major cut would be highly unpopular politically.
Ultimately, there is no right answer
While many experts will advise retirees to wait as long as possible to file for Social Security, at the end of the day, there's no single right answer. It all depends on a retiree's individual situation. Those who are healthy and have enough income from other sources to cover their daily expenses in retirement are best able to delay and collect a larger Social Security check.
On the other hand, someone struggling to keep up with their monthly bills or grappling with major healthcare expenses will understandably claim benefits early. Ultimately, retirees who understand how timing affects their Social Security will be in a better position to make the optimal decision given their personal situation.
