Before I jump into our main topic today, note that the first estimate of second quarter GDP came in better than expected at 2.1% (annual rate) last Friday and is expected to improve in the last half of this year. Now let’s get started.
A new report out earlier this month found that almost all American retirees – 96% – claim Social Security (SS) benefits at the wrong time. Making the decision at the wrong time, the report says, costs the average American household $111,000 in benefits they could have received. Got your attention yet?
Those entering retirement can tap their Social Security benefits as early as age 62, or they can boost their monthly SS checks by about 8% every year they wait until age 70, when the maximum benefit accrues. The advantage to waiting is significant: A person eligible for a $725 monthly check at age 62 could get a check for $1,280 if they wait to start at age 70. That’s a huge increase!!
United Income, a firm that provides financial advice to retirees, teamed up with former Social Security officials to simulate retiree decisions on when to claim benefits – along with factors that include income, wealth, taxes, health status and longevity. Their eye-opening report is entitled “The Retirement Solution Hiding in Plain Sight” and was based on surveys of over 2,000 American households.
When to take Social Security is a key decision for America’s retirees, for whom the program has become a critical safety net. About half of older Americans get most of their income from the program.
Unlike investments and other sources of retirement income, Social Security benefits are guaranteed to keep up with inflation and last for life. That’s important when half of all 65-year-old American women can expect to live past age 86, according to Social Security estimates. The average life expectancy for US men who are currently 65 is age 84.
As you might expect, the report concludes that most retirees would be better off financially by waiting longer to claim their SS benefits, although there are some circumstances when they should claim them sooner (as I will discuss below).
Only 4% of U.S. retirees are waiting until age 70 to claim Social Security, while 57% should be doing so, the report calculated. Meanwhile, more than 70% start taking checks before turning 64 – a time when, ideally, only 6.5% of retirees should be cashing checks.
Reasons Why So Many Claim Social Security Too Early
The report found that those currently in retirement in the U.S. are leaving a collective $3.4 trillion on the table by claiming their benefits too early. So why are 96% of retirees leaving trillions behind that they could have collected if they had waited? Here are several reasons.
First, many, if not most, people in the second half of life, are cash poor. They can’t wait until age 70 when their retirement benefits would be substantially higher than if they started claiming at 62.
Second, most retirees don’t know how to calculate the value of extra Social Security benefits they’d receive in the future from exercising patience. The claiming tools used by many financial planning companies, are not always reliable and often get it wrong, according to reports I read.
Third, the vast majority of those entering retirement don’t use any Social Security software available to make what, for many, is their most important financial decision.
The fourth reason is that retirees fear they will die before collecting what they are owed from Social Security. “Take your benefits. You could die tomorrow,” is what many Social Security staffers inappropriately tell people when they make benefit inquiries.
The fifth reason people take their Social Security benefits too early is they think they can invest that money in the stock market and make a lot more. This is irrational. The implicit, perfectly safe, real investment return from waiting to collect higher benefits is about three times more than you can earn on the market, based on historical averages.
Sixth, Social Security recipients fear future cuts in benefits because they’ve heard Social Security is insolvent. Yet politicians aren’t likely to cut benefits of current beneficiaries or people close to retirement. So, a benefits cut, which may be coming down the road, is a potential problem for younger people, not for those now retired or about to retire.
How Can We Solve This Social Security Problem?
First off, if you’re healthy and expect to live a long time, you should maximize benefits received late in life by delaying. But as noted above, the report finds that people don’t do this. Those who ended up dying before 75 were just as likely to have claimed early as those who died after 85.
So, what can be done to solve this dilemma? United Income, the report’s authors, suggests eliminating the option to take retirement benefits in the early years, with exceptions for those with an incontrovertible need to do so. Of course, this would force millions to work longer, which may not be a bad thing. But I think the current crop of politicians wouldn’t touch it.
The report also suggests the Social Security Administration change how it frames claiming options to the public. Instead of calling age 62 the “early eligibility age,” the authors suggest claiming at 62 be labeled “the minimum benefit age” and age 70 labeled “the maximum benefit age.” That might help, but it doesn’t solve the problem, in my opinion.
Another option the authors suggest is to let retirees take a portion early – say, one third – of their SS benefit, while letting the rest of the benefit grow. This would alleviate the cash flow constraints facing so many early beneficiaries. Mechanically, they say, this would be fairly easy to implement.
Finally, there is currently a way to claim benefits early but “suspend” them until later to allow them to continue to grow. This is a little complicated and is not suitable for everyone, so talk to your financial planner or whoever assists you with your finances.
The Case for Claiming Social Security Benefits Early
There is a theory out there that says, in the end, you’ll probably get the same amount, no matter when you claim your benefits. That’s not true for most people, especially since we are living longer. Other retirement experts have done the math and determined that, assuming you’re in reasonable health and can afford to wait, you should. That’s especially true for women, who are more likely to live longer.
Then again, it’s not true for people who might die earlier. For people who are in poor health or have a family history of dying early, taking benefits early may be the best option. This is obviously true for those who have been diagnosed with a terminal disease and only expect to live a certain number of years.
There are other reasons for claiming benefits early. Here, too, I strongly recommend you speak with a financial professional before making your decision. A lot of money could be at stake.
Baby Boomers Not to Blame for Social Security Problems
Speaking of untrue theories about Social Security funding problems, many people believe Baby Boomers have drained the SS surplus. It’s hard to argue against that claim when 10,000 people turn 65 every day, according to the Census Bureau. Yet a new study found that’s simply not true.
According to a new study by the Center for Retirement Research at Boston College, Baby Boomers will have paid more into Social Security than what they will receive in retirement. This is another flawed theory about the SS funding deficit, but that fact probably will not stop the fear-mongers from promulgating it. Many have not bothered to read this latest evidence. But as a Boomer myself, I’m glad to know this and pass it along to you.
And here’s one last factoid to share: The number of Americans 65 and older who are still actively employed is at a record high. The ratio of the 65-and-older cohort as a percent of the employed civilian population today stands at a record 6.4%. It has more than doubled since 1999.
Another major factor is the often-surprising discovery by many of the elderly that, financial consideration aside, the “golden years” of retirement are less personally satisfying than productive employment. Expect this trend to continue.
Gary D. Halbert is the president and chairman of Halbert Wealth Management, Inc. His Forecasts & Trends Weekly E-Letter may be obtained free of charge by subscribing at www.halbertwealth.com.