The decision on when to start receiving Social Security benefits is a pivotal financial choice for retirees, complicated by the program's flexible claiming age options. Individuals may initiate access to benefits as early as 62 years old or defer until reaching 70, impacting the benefit size and longevity of payments.
Core to understanding the implications is the concept of a person’s full retirement age (FRA), which serves as the baseline for calculating monthly benefits. For those born in 1960 or later, this age is set at 67. If a retiree begins claims before their FRA, each early month reduces their potential monthly benefit from the FRA entitlement level. Conversely, delaying benefits past the FRA increases monthly payments cumulatively until age 70.
Specifically, claiming at 62 can lead to a reduction of benefits by approximately 30%, while postponing until age 70 can boost benefits by roughly 24%. The mechanism underlying these adjustments is designed to equate the total expected lifetime benefits regardless of claiming age, though variations in lifespan and personal circumstances can affect outcomes.
In recent research conducted towards the end of 2022 by economists affiliated with the National Bureau of Economic Research, the Federal Reserve Bank of Atlanta, and Boston University, a detailed examination of lifetime benefits was undertaken. Their report, titled "How Much Lifetime Benefits are Americans Leaving on the Table?," underscored that nearly all Americans aged between 45 and 62 would statistically benefit from deferring Social Security claims until after 65.
Moreover, the study revealed that about 90% of this population cohort should ideally wait until age 70 to start benefits to maximize the economic value of their Social Security, though only approximately 10% actually do. The financial implication of this delay is substantial, potentially increasing lifetime discretionary spending by over $182,000—or nearly 10%. Even more striking, for some one in ten individuals, lifetime spending could see a 26% uplift by waiting until age 70.
Yet, despite clear economic incentives, a sizable majority opt to claim benefits earlier than optimal from a purely statistical and financial perspective. Several contributing factors explain this divergence. Rising living expenses in the modern era have strained many retirees’ financial capacity. The challenges of homeownership costs and accumulating sufficient retirement savings lead to immediate need for income.
Health considerations further complicate timing decisions. The emergence of health issues often necessitates accessing benefits sooner. Additionally, widespread misconceptions about the sustainability of the Social Security Trust Fund fuel early claims. Misinformation suggesting the program may become insolvent by 2034 or 2035 drives some individuals to maximize benefits by claiming at the earliest opportunity, even though the potential reduction in monthly payouts impacts long-term benefit receipt.
Ultimately, the decision on when to claim Social Security is deeply personal and hinges on individual financial standing and health prognosis. While delaying claims until age 70 yields the highest possible benefits statistically, practical circumstances frequently dictate earlier claiming.
Individuals capable of postponing claims to age 70 should weigh this option carefully as it stands to increase total lifetime benefits substantially, potentially enhancing quality of retirement living. However, there is no universally "correct" claiming age, reinforcing the importance of personalized financial planning aligned with one’s situation.