Most Are Taking Social Security at the Wrong Time

A new report finds that almost no retirees are making financially optimal decisions about when to take Social Security and are losing out on more than $100,000 per household in the process. The average Social Security recipient would receive 9 percent more income in retirement if they made the financially optimal decision.

Posted on September 30, 2019

When claiming Social Security, you have three options: You may begin taking benefits between age 62 and your full retirement age, you can wait until your full retirement age, or you can delay benefits and take them anytime up until you reach age 70. If you take Social Security between age 62 and your full retirement age, your benefits will be reduced to account for the longer period you will be paid. If you delay taking retirement, depending on when you were born, your eventual benefit will increase by 6 to 8 percent for every year that you delay, in addition to any cost-of-living increases.

The new report, conducted by United Income, an online investment management and financial planning firm, found that only 4 percent of retirees make the financially optimal decision about when to claim Social Security. Nearly all of the retirees not optimizing their benefits are claiming benefits too early. The study found that 57 percent of retirees would build more wealth if they waited to claim until age 70. However, currently more than 70 percent of retirees claim benefits before their full retirement age. Claiming before full retirement is the financially best option for only 6.5 percent of retirees, according to United Income.

The consequences of claiming Social Security too early can be big. The report found that collecting benefits at the wrong time causes retirees to collectively lose $3.4 trillion in potential income (an average of $111,000 per household). The report also estimates that elderly poverty could be cut in half if retirees claimed benefits at the financially optimal time.

One reason most people do not optimize Social Security is because waiting to collect benefits means their overall wealth may fall during their 60s and 70s. They also may not be aware that collecting benefits before full retirement age means that their benefits will be permanently reduced. According to the report’s authors, policy changes are necessary to get retirees to wait to claim benefits. The report recommends that early claiming be made the exception and reserved for those who have a demonstrable need to collect early. Another recommendation is to change the label on early retirement and call it the "minimum benefit age."