Key Highlights
- Nine in 10 working Americans plan to ignore the advice of waiting until age 70 to claim benefits.
- The study suggests that many people need the income generated by Social Security immediately upon retiring.
- Most respondents understand the trade-offs but only 10% plan to wait until age 70 for higher monthly payments.
- A majority of Americans don’t know much about Social Security or how it will fit into their retirement plan.
The Decision Dilemma: Ignoring Financial Advice on Social Security
According to a new study from investment firm Schroders, nine in ten working Americans are planning to ignore one of the most common pieces of financial advice regarding Social Security—waiting until age 70 to claim benefits. This decision could result in significantly lower monthly payments for life.
The Financial Reality
While claiming Social Security early (at age 62) provides immediate income, it comes with a trade-off: the monthly benefit amount is reduced by about 30%. By contrast, delaying claims until age 70 results in a roughly 24% higher monthly payment. Financial experts often recommend holding off as long as possible to maximize benefits.
Deb Boyden, head of U.S. defined contribution at Schroders, emphasized that the decision not to wait for higher Social Security payments is a common one among Americans. She noted, “According to our research, 70% of Americans are aware that waiting longer to claim Social Security leads to higher payments, and yet so few are willing to hold off.”
Health Concerns and Immediate Income Needs
Many retirees start claiming benefits early due to financial necessities. Health issues or chronic conditions often lead individuals to expect a shorter-than-average lifespan, prompting them to collect Social Security earlier. Additionally, the break-even point is another factor: at age 70, one would receive a higher monthly payment but not surpass the total collected from starting at 62 until that age.
For instance, an individual who starts collecting at 62 will have received benefits for eight years compared to just over two and a half years if they start at 70. At today’s average monthly benefit of $2,000, the early claimer would receive about $14,000 less in total benefits by age 70 than someone who starts collecting later.
Concerns About Social Security’s Future
Many Americans’ decisions to start claiming benefits earlier are also driven by concerns over the future of the program. Despite Social Security payments currently outpacing contributions, the U.S. government’s trust funds are projected to become insolvent by 2034 if no changes are made. However, even in such a scenario, payments would continue but be reduced by about 20%. This uncertainty adds another layer of complexity to the decision-making process.
Implications for Retirement Planning
The findings highlight the need for better retirement planning and education among working Americans. According to Boyden, non-retired individuals believe they need $5,032 in monthly income to retire comfortably, while current retirees generate about $3,250 on average. The gap suggests a significant disparity that needs addressing.
Industry experts recommend exploring alternative retirement options such as reverse mortgages and understanding the various Medicare Advantage Plans available. These measures can help bridge the financial gap and ensure more secure retirement years for Americans.
Conclusion
The decision to claim Social Security benefits early or later is a complex one, influenced by both financial needs and personal circumstances. As the population ages and social security faces potential challenges, it becomes increasingly important for individuals to plan ahead and understand all available options. The industry must work towards providing clearer guidance and resources to help Americans navigate these critical decisions.
