One aspect that makes the Social Security program so confusing is that retirees can choose when to claim benefits. Retirees can claim Social Security as early as age 62 and as late as age 70.
There are, of course, trade-offs depending on which age one claims. The earlier one claims benefits, the less they are likely to receive in benefits, and the later one claims, the more they are likely to receive in benefits. It all has to do with a person's full retirement age (FRA), which is 67 for those born in 1960 or later.
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Each month a retiree claims benefits prior to their FRA results in a reduction to the full benefits they would have been entitled to at their FRA. Each month a retiree delays claiming benefits past their FRA results in an increase. Generally speaking, if a retiree claims benefits at age 62, their benefits could be reduced by 30%. Delaying benefits until age 70 can result in a 24% increase.
The Social Security Administration aims to ensure that, regardless of the age at which one claims benefits, they will ideally receive the same amount of benefits over their lifetime. While there is great debate on the topic, statistics say this is the best age to claim benefits.
The best decision is the road least likely to be taken
In late 2022, the National Bureau of Economic Research, the Federal Reserve Bank of Atlanta, and Boston University co-authored a study called "How Much Lifetime Benefits are Americans Leaving on the Table?"
The study found that virtually all Americans aged 45 to 62 should wait until after age 65 to collect benefits. Additionally, the study concluded that 90% of Americans should wait until age 70 to claim benefits, yet only about 10% actually do so. If workers aged 45 to 62 delayed claiming benefits until age 70, they could increase their lifetime discretionary spending by over $182,000, or 10%. In fact, one in 10 workers could actually increase their lifetime discretionary spending by 26%.
If the answer is so obvious, then why don't more people wait until age 70? Well, there's always a gap between actual human behavior and economics. For one, the cost of living has soared in the 21st century, and very few people can afford to buy a house and save adequately for retirement.
What ends up happening is that people end up claiming at age 62, simply because they need the money, whether to cover daily expenses or because a new health issue emerges. There are also many incorrect rumors that Social Security will completely run out of money by 2034 or 2035, leading many people to take Social Security as soon as possible.
Ultimately, there's no right answer for when to claim Social Security. It depends on your individual finances and health. However, retirees who can delay taking Social Security until age 70 should highly consider it.
