When to collect Social Security is a personal choice. Consider your present health, spouse, and other retirement income sources. Retirees can make the same critical error: collecting benefits too early and underestimating their lifespan.
When you collect Social Security determines how much you earn. The full retirement age is 66-67. While retirees can legally begin collecting reduced benefits at age 62, those who do so will see their monthly lifetime benefits reduced by 30%.
There’s another reason for retirees to wait until they’re really retired. In other words, pensioners who wait three years past full retirement age will see their monthly social security check grow by up to 24%.
The issue is that most people are impatient. According to the Congressional Research Service, only 15% of new worker claimants were over 66 in 2019. Another 33% started at 62, and 60% started beneath 66.
According to Money Magic author and Boston University economist Laurence Kotlikoff, the worst Social Security error is taking early retirement.
“Around 85% of people should wait until 70 to retire, but only 6% do. Retirement leaves a lot of money on the table since people are focusing on life expectancy and not their maximum age,” says Kotlikoff.
Why do people rush to apply for Social Security benefits before they reach full retirement age?
Select spoke with Suzanne Shu, a marketing professor at Cornell University, about why people sometimes collect Social Security payments too early.
Why do people claim early Social Security?
According to Shu, one of the main reasons people receive payments early is a misunderstanding of how the program works.
S.S.A. determines benefits based on a person’s 35 greatest earning years. The program is funded by current employees through a 6.2 percent payroll tax of up to $147,000 per year.
As if retirees are thinking of Social Security as a 401(k) or defined contribution plan, says Shu. “The more people feel ownership, the more they want to claim early.”
Personal ownership over advantages and loss aversion — the assumption that people are more sensitive to losses than gains — both play a role in the early collection, according to Shu.
People believe they are entitled to Social Security payments because they have paid into the system all their lives. Many feel they will lose benefits if they don’t collect early because they expect to die sooner than they do.
Just as people enjoy the immediate satisfaction of not going to the gym today and delaying that visit until tomorrow, they don’t typically consider the long-term repercussions of collecting early, according to Shu.
Of certainly, life expectancy matters. Even those with longer lifespans tend to underestimate their own lifespans, says Shu.
According to the Social Security Administration, a 65-year-old male will live to 84.1 in 2022, while a 65-year-old female will live to 86.7.
“Let’s imagine they’ve worked for 30 years. “It’s possible they’ll live another 30 years in retirement,” says Shu. This reduces the urgency to claim your benefits if you consider your retirement years as near to your working years.
How can this be avoided?
She doesn’t give a blanket direction to withhold benefits because everyone’s situation is unique. She advises people to compile a list of reasons why delaying benefits is preferable to collecting early.
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And the research backs it up. A 2015 study divided participants into two groups. After considering grounds for supporting early claiming, the second group was instructed to analyze the same issues in the opposite order.
The second group elected to delay claiming by 9.4 months on average because they were encouraged to plan for the future and had examined the benefits of delaying claiming.
Consider how much more money you earn by delaying benefits, especially if you live into your 80s or 90s, adds Shu. People rarely consider the consequences of collecting early and locking in a reduced monthly payment.
Also, when planning for retirement, keep in mind that Social Security payouts rarely cover all of a retiree’s expenses.
According to the Center on Budget and Policy Priorities, Social Security benefits only replace around 37% of former wages for someone who works all of their adult life and retires in 2022.
That is, having alternative retirement resources, whether Roth, traditional or 401(k), is critical.
According to Select, the finest IRAs are offered by Charles Schwab, Fidelity Investments, Vanguard, Betterment, and E*TRADE.
Most people are subject to typical mindsets like impatience, loss aversion, and a strong sense of ownership, which affect how we make key financial decisions.
In order to avoid these usual mistakes, retirees should write down reasons for delaying social security benefits, examine life expectancies, and weigh the regret they may experience if they are stuck with a lesser monthly payment well into old age.