When it comes to claiming Social Security retirement benefits, Americans face a pivotal decision: to start receiving payments as early as age 62 or to delay benefits until as late as age 70. Each month of delayed claiming after age 62 increases the monthly payout until age 70, after which no further increase occurs. However, despite this built-in incentive to postpone benefits, a significant majority of individuals are choosing claim times that do not maximize their lifetime Social Security income.
Recent research from the National Bureau of Economic Research (NBER) highlights that only about 10.2% of workers select their Social Security claiming age optimally. In practical terms, this means nearly 9 out of 10 people make decisions that fall short of maximizing their benefits.
The fundamental reason behind this trend is straightforward: many individuals opt to claim benefits as soon as they become eligible at age 62, or at least by their full retirement age, which is 67 for persons born in 1960 or later. While this approach prioritizes immediate benefit receipt, it overlooks the financial advantages of waiting longer.
According to NBER's data, for over 90% of retirees, waiting until age 70 to claim Social Security results in greater total lifetime income. The penalty for claiming earlier is not trivial. The median loss associated with early claiming amounts to approximately $182,370 over an individual's lifetime. This sizeable financial gap underscores the potential cost of premature benefit claims.
The Social Security program's benefit calculation system incorporates reductions for early claims and credits for delayed claims. This design conceptually equates the present value of lifetime benefits regardless of claiming age, based on assumptions prevailing at its inception, such as shorter life expectancies. However, contemporary longevity trends have exceeded these initial parameters, resulting in longer retirement spans for most individuals.
Therefore, for many retirees today, delaying benefits until age 70 allows the accrued monthly increase to outweigh the foregone payments from earlier claiming. Yet, not everyone waits, largely due to practical considerations. Some retire before 70 but lack sufficient savings or income to support themselves until claims commence. Consequently, they begin Social Security benefits early to meet ongoing expenses, despite understanding the trade-offs.
To address this challenge and optimize retirement income, individuals should prioritize saving diligently in retirement accounts such as 401(k) plans. By accumulating adequate financial resources to support living expenses before age 70, retirees can afford to delay Social Security benefits and thus enhance their long-term income potential.
Consistent contributions to retirement accounts, leveraging employer matching contributions where available, and pursuing prudent investment strategies are essential components of this approach. Adequate savings foster financial flexibility that enables individuals to wait for the highest Social Security monthly payments, which contributes both to increased lifetime income and improved retirement security.
In summary, although the decision to claim Social Security benefits early may be understandable in the context of immediate financial needs, the data strongly suggest that postponing benefits until age 70 is advantageous for the majority. Boosting personal retirement savings to bridge the income gap prior to claiming Social Security can mitigate the impact of early claims and help retirees realize a more financially sound retirement.