There’s a simple way to quickly increase your retirement security, but far too few retirees are doing it.
Almost all Americans should wait beyond the age of 65 to claim their full Social Security benefits, while more than 90% should hold out until 70 when they get even more, according to a new research report. But only 10% wait until 70.
The advice comes as Americans live longer, face a retirement that could last more years than expected, and encounter unexpected events that could make delaying harder, even if it means more money.
“America is facing a retirement crisis. Far too many Baby Boomers are retiring far too early with far too little savings,” Laurence Kotlikoff, a Boston University economics professor and one of the report’s authors, told Yahoo Money. “They can alleviate, if not eliminate this problem. They simply need to make Social Security collection decisions that optimize their lifetime benefits–something almost none are doing.”
How delaying can help
Your retirement may stretch out far longer than you think.
A 65-year-old male today, in average health, has a 54% probability of living to age 85, according to The Society of Actuaries (SOA). For a 65-year-old woman, the likelihood of reaching 85 is 65%. And one in three 65-year-old men in average health has a chance of living to 90. Nearly half of women age 65 in average health, will probably make it to 90.
That means your retirement savings need to last a long time and Social Security can help with that.
Let’s say you turn 62 in 2022, your full retirement age is 67, and your monthly benefit starting at full retirement age is $1,000. If you start getting benefits at age 62, the Social Security Administration reduces your monthly benefit 30% to $700 to account for the longer time you receive benefits. This decrease is usually permanent.
If you choose to delay getting benefits until age 70, you earn delayed retirement credits, which comes to roughly an 8% per year annual increase for each year between your full retirement age until you hit 70 when the credits stop accruing. That would increase your monthly benefit to $1,240.
The benefit at age 70 in this example is about 77% more than the benefit you would receive each month if you start getting benefits at age 62 — a difference of $540 each month.
This is a significant amount especially since Social Security provides a major source of income for almost two-thirds of retirees, according to the Employment Benefit Research Institute (EBRI) 2022 Retirement Confidence Survey.
Not only do you get rewarded with bigger checks by waiting until age 70, but the “benefits are linked to the Consumer Price Index,” David Blanchett, PGIM DC Solutions’ head of retirement research, told Yahoo Finance. “It's a great way to hedge both inflation risk and longevity risk.”
For instance, Social Security benefits will increase 8.7% next year as part of the annual cost-of-living adjustment (COLA) for 2023.
“Today’s inflation, in particular, is making folks who weren’t interested in delaying claiming Social Security consider it,” Blanchett said. “It gives them an option to kind of hedge against future inflation increases.”
Why people don’t wait
Certainly, life events such as job loss and health issues often prevent older Americans from delaying Social Security, and economic conditions like a swooning stock market and recession worries may also convince some to claim earlier than they should to avoid tapping accounts that have lost value.
“Most people claim benefits when they need them,” Linda Benesch, communications director at Social Security Works, told Yahoo Money. “The most common age to claim benefits is 62 because many people — especially if they've been pushed out of the workforce, or forced to take lower paying jobs due to factors like age discrimination and inability to do physically demanding jobs — can’t afford to wait.”
About half of Americans take Social Security before their full retirement age (FRA), which ranges in age from 66 to 67, Martha Shedden, president of the National Association of Registered Social Security Analysts (NARSSA), which trains advisors on how to help their clients make optimal Social Security decisions, told Yahoo Money.
Of the 50% who take the benefit before their FRA, a quarter of those are men and just under a third of women take Social Security as soon as they’re eligible at age 62, she said.
“While many cannot afford to wait, other reasons include the myths, misunderstanding, and falsehoods about how the Social Security program works. This can lead to feelings that they may ‘miss out’ if they don’t claim soon.” Shedden said. “We have the highest COLA increase in four decades and some people may think that if they’re not collecting, they will not benefit from that increase. Not true.”
In fact, the annual Social Security COLA is applied to your benefit amount — even if you haven’t claimed yet.
Three steps to help you push back your benefit
One way to delay is to stay on the job as long as you can.
“If you can delay retirement for a little while, even hanging on for another six months, another year, another year and a half if you can, it you gives you that opportunity to delay Social Security and to allow the money in your retirement account to continue to grow because you're contributing to it,” Jean Chatzky, CEO of HerMoney.com told Yahoo Finance.
You can also opt to tap into other investments or retirement accounts to tide you over. Or look for ways to generate cash by downsizing your home. You might move to a location where the cost of living is less.
“This question of running out of money in retirement is not one that we have really educated people on nearly enough,” Chatzky said. “We've talked for years about the need to accumulate money for retirement. But the question of running out requires a strategy because we're talking about a period of retirement that can last 30 or 40 years.”
There are two online tools that can help you run the numbers. The Social Security Administration’s calculator compares retirement benefit estimates based on your selected date or age to begin receiving benefits with retirement estimates for ages 62, Full Retirement Age (FRA), and 70. AARP’s Social Security Calculator runs you through the math of when to apply for benefits and how much you’ll get.
To Kotlikoff, one of the biggest stumbling blocks that pushes retirees to turn on their Social Security benefit as soon as they’re eligible is that they’re reluctant to spend down other savings accounts first, particularly, tapping money invested in their retirement accounts such as 401 (k) plans.
“They think they're going to make a killing in the market one day,” he said. “That's largely Wall Street convincing them that they need to leave it in there and the reward will come. It might. But you certainly can’t count on the kind of return you get in Social Security checks for the rest of your life if you have the planning and patience to wait.”
Kerry is a Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon