Americans lose trillions claiming Social Security at the wrong time!

The age at which most people claim Social Security (green line) is opposite to the age at which they SHOULD claim Social Security (purple line in graph above).

According to The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions, “retirees will collectively lose $3.4 trillion in potential income that they could spend during their retirement because they claimed Social Security at a financially sub-optimal time, or an average of $111,000 per household.”

This comprehensive study observed 2,024 households, considering each household’s outside resources, spending, health, and longevity to determine how much income and wealth they would have if they had taken Social Security at the various ages of eligibility.

Although later claiming typically caused wealth to drop during a person’s 60s as they drew down their personal retirement accounts, this wealth drop was more than made up for by the late 70s when Social Security income was higher. In order to isolate the effect of claiming age, the study did not consider the effect of working longer, but in real life, a person who decides to maximize benefits by claiming at 70 might choose to work a few years longer, and this would mitigate some or all of the wealth drop in their 60s.

The study found that a claiming age of 62–64 is optimal for only about 8% of adults (primarily those with short life expediencies or low-earning spouses)— yet about 79% of eligible adults in the sample claimed at those ages. A claiming age of 70 is optimal for 71% of primary wage earners—yet only 4% of the adults in the sample claimed at that age.

In other words, only 4% of retirees make the optimal claiming decision.

Among those at the highest wealth levels, 99% make suboptimal claiming decisions. Yes, you read that right. Ninety-nine percent of higher-wealth households make suboptimal claiming decisions. While it’s true that wealthy individuals can afford to leave Social Security benefits on the table, what’s troubling is that they are not getting good advice.

The study notes that very few wealth managers advise on Social Security claiming decisions, and those who do have a disincentive to advocate for later claiming because it would mean removing assets earlier than clients otherwise would. The report says that wealth managers are being short-sighted about this because later claiming eventually increases the amount of assets for them to manage.

In its conclusion the report mentions a few ways to deal with suboptimal claiming choices, including:

1) make early claiming an exception, reserved for those who have a demonstrable need to claim benefits before full retirement age;

2) change the way we refer to early or delayed claiming, labeling a claiming age of 62 as the “minimum benefit age” and 70 as the “maximum benefit age;”

3) remove the disincentives wealth management firms have for delivering optimal claiming advice (i.e., the near-term drop in assets) by providing “cover” for executives to make the right financial decision for their clients and the right long-term decision for their shareholders; and

4) provide SSA with more resources, perhaps in partnership with third-party fiduciaries, to help households determine their optimal claiming age.

Moral of the story:

Think carefully about Social Security and recognize your own biases and fears that lead to claiming at your minimum benefit age. For example, the myth that if you don’t claim benefits early, they’ll be reduced later. Proposals typically don’t reduce benefits for those based on ages in their 50’s which have nothing to do with already claiming benefits or not … in other words, grandfathering enters the picture too because law makers realize people need enough advance notice to properly adjust their plans before reaching their 60’s and later to offset proposed benefit reductions.

Proposed reduction in benefits to help make Social Security more solvent do not depend on whether you have claimed benefits or not. They’re based on what year you were born; you can’t change that.

Thus, evaluating when to claim benefits, which may also not be the same age you stop working and stop receiving earned income, takes into account your specific situation and how much you’ve already saved. This is especially true for couples since claiming age affects survivor benefits as well.

Original article for an adviser newsletter by Elaine Floyd, CFP®, Director, Retirement and Life Planning, Horsesmouth, LLC, within which I’ve made edits for the broader public.

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