If you're nearing retirement, you may be asking yourself the same question millions of Americans have asked themselves: when should I begin claiming my Social Security benefits? The unfortunate truth is that the vast majority of claimants make the wrong decision, impacting their financial security late in life when it matters most.
It's true that retirement planning is highly personal and one-size-fits-all prescriptions are rarely useful, but according to a study conducted by a non-partisan economic research organization, almost all Americans would be best served by waiting until age 70 to collect Social Security benefits. Despite this finding, less than 10% of beneficiaries do so.
The immediate impact
Full retirement age (FRA) -- also called normal retirement age (NRA) -- is 67 for those born in 1960 or later and 66 for those born before 1955. If you were born from 1955 through 1959, your FRA is between 66 and 67. You can see a full chart here. If you choose to wait until your FRA to begin collecting, you will receive 100% of your primary insurance amount (PIA), the Social Security benefit you are entitled to based on your lifetime earnings.
You can, however, choose to claim as early as 62. If you do so, however, you'll be penalized. Each month before your FRA incurs a penalty of 5/9 of 1% (for the first 36 months prior to turning 67) and 5/12 of 1% (for the next 24 months). All told, you could lose as much as 30% of your intended PIA.
If, on the other hand, you wait until after you turn 67 to claim, you receive a larger benefit. Each month that you wait earns you 2/3 of 1%, or 8% annually. That means if your FRA is 67 and you wait until age 70 to collect, you will receive 124% of your PIA.
If you were born in 1960 and your PIA is $2,000, you could receive as little as $1,400 or as much as $2,480, depending on when you choose to claim.
The long-term effects
While the gap in benefits is clear, what about the delay? Many who claim early believe that the reduction in benefits is made up for by the additional time they are collecting. However, this is based on flawed logic. The longer you wait to claim, the more money you will end up receiving in retirement -- at least for the vast majority of people. This translates directly to a boost in lifetime discretionary spending -- how much money you are able to spend on non-essentials even before retirement; this is the main target of the study.
The study found that the median lifetime increase was north of $182,000, with the upper end gaining almost $900,000 over their lifetimes. Although the last figure is for high earners, as a percentage of total spending, those at the lower end of the income spectrum actually benefit most by waiting -- the median gain for lower-wage workers who wait is 16%.
Not only do you end up having more money to spend, but you are also better equipped to handle a financial worst-case scenario in retirement. Most people underestimate how long they will live and plan more for an average life span rather than a maximum life span. Although most would love to live very long lives, living to 95 or 100 could be a financial disaster for many. By claiming early, your risk of outliving your savings greatly increases.
The benefits of waiting
The research makes it clear that the best option for most people is to wait as long as you are able. There are extenuating circumstances that may make it impossible to do so, and waiting to claim is not without its downsides. Most will feel a significant financial pinch between 62 and 70, but in the long run, it is often the best choice.
