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Almost all Americans take Social Security at the wrong time, study says

Social Security and retirement
  • Only 4% of retirees claim Social Security at the most financially optimal time, a new study finds.
  • The remaining 96% of retirees are losing out on $3.4 trillion, or about $111,000 per household.
  • Americans can claim Social Security as early as age 62, but the benefit grows each year they wait, maxing out at age 70.
  • When to draw benefits can be a complex decision, based on health, savings and marital status.

One of the most important decisions in retirement is when to start claiming Social Security. Unfortunately, almost all Americans start taking the benefit at the wrong time, losing out on about $111,000 per household. 

Only 4% of retirees start claiming their Social Security benefits at the most financially optimal time, according to a new study from United Income, an online investment management and financial planning firm. That means the remaining 96% of retirees are losing out on a collective $3.4 trillion in potential retirement income, or about $111,000 per household. 

Americans typically can start claiming their Social Security benefits as early as age 62 and most adults do so by the time they turn 63. But the size of the monthly benefit grows around 8% annually for each year they wait, maxing out at age 70. But the complexity of the program -- its handbook has more than 2,700 entries on topics ranging from remarriage to black lung benefits -- means that many Americans aren't fully informed before they pull the trigger.

Of course, it's not just a financial equation. Deciding when to draw benefits depends on a myriad of personal factors such as age, health, other savings, marital status and plans for retirement. But the report's authors say people aren't spending enough time sorting through this process and policymakers could do more to encourage it.

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"If you have the discussions, you can you optimize your decisions," said Jason Fichtner, former chief economist at the Social Security Administration and one of the report's authors. "These discussions aren't necessarily happening for everyone."

Americans are woefully under-educated when it comes to Social Security, according to earlier studies from the Government Accountability Office, the AARP and the Financial Literacy Center. Many Americans don't understand how many years of work their Social Security benefits are based on, for instance. And Social Security's claims specialists and the online claims process don't always provide key information or explain choices clearly, the GAO found in 2016. 

Underprepared

Discussions about how to optimize Social Security are important because Americans are increasingly in charge of their own retirement planning and Social Security is a major component. It accounts for about one-third of all income annually received by U.S. retirees. 

And many Americans are underprepared to supplement their retirement with their own savings. For about one-third of retirees, Social Security is their primary source of income.

"It is not just about increasing your income, it's about increasing your chances you'll be able to afford retirement," said Fichtner.

Reducing elderly poverty 

The researchers also estimate that elderly poverty could be cut by 50% if all retirees claimed Social Security at the optimal time. They suggest policymakers make changes to encourage people to claim at a more financially advantageous age, such as improved education for those eligible for Social Security or changing the terminology to indicate that benefits may increase with time. For example, researchers suggest that instead of calling 62 the "early eligibility age" it could be labeled the "minimum benefit age."

While there is no one optimal age, the researchers found that 92% of retirees would be better off waiting to claim Social Security until at least their 65th birthday. The exact timing is tough to pinpoint, even varying within households depending on age and who earned more.

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That being said, there are people who are better off taking the benefits as soon as they can, such as those in poor health who have less time to enjoy their benefits.

Waiting longer

For others, waiting for the ideal time to claim would mean losing wealth in their 60s as it would require them to live off savings or investment account withdrawals instead of Social Security benefits.

"This shouldn't be about 'claim early' or 'claim late', it should be a discussion," Fichtner said. "If anything, just claim as late as you financially can."

The researchers analyzed the information of more than 2,000 households in a Social Security Administration-sponsored survey. Using info respondents provided about health, longevity, finances and other details, they used forecasting technology to simulate how much their households would be worth throughout retirement based on various timing options. The study did not assume any additional job income in calculating the optimal age.

Why don't people wait to claim later? Teresa Ghilarducci, a professor of economics at the New School in New York City and a retirement expert who was unaffiliated with the study, says that there are many reasons. That includes personal dynamics within a marriage, financial advisers who would lose out if you draw from investments early, a desire to boost income as many older Americans work low-wage jobs, and difficulty in estimating how long you have to live.

While not a complete solution for insufficient savings, the study's authors say that optimizing Social Security would improve the lives of millions of retirees.

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