Most people make the wrong decisions about when to claim their Social Security retirement benefits. Only about 4% make the optimum claiming decision, according to a study released a couple of years ago by financial services firm United Capital.
The researchers had access to data from a long-term health study of Americans and were able to match that information with the Social Security claiming decisions of the individuals. The data allowed the researchers to use hindsight to determine the claiming decision that would have maximized lifetime benefits for the individuals. They concluded that most Americans claim their benefits too early and over their lifetimes shortchange themselves of $100,000 or more of benefits.
We can’t use hindsight to make our personal Social Security decisions, but we can determine probabilities of what’s likely to happen and use those probabilities to improve decision making.
Knowing what leads to less-than-ideal decisions can help people make better decisions. Let’s look at the reasons that seem to influence Social Security claiming decisions and lead people away from the optimum choices.
Social Security is going bankrupt. The Social Security retirement trust fund is running out of money. The 2020 Annual Report from the Trustees of Social Security issued in April 2020 estimated that the trust fund would run out of money in 2034. That estimate was made before the pandemic recession. Several sources estimated the recession would cause the trust fund to run out of money two to four years earlier. The trustees will issue their latest estimate in the next few months.
The coming exhaustion of the trust fund causes many people to reason that they should claim Social Security benefits as soon as they can so they’ll receive some benefits while they can.
But Social Security retirement benefits won’t end after the trust fund is empty. Payroll taxes that come in each year are estimated to be able to support 75% to 80% of promised benefits for at least 75 years. At worst, there will be a 20% to 25% across-the-board cut in benefits.
But Congress is likely to step in before that happens. Based on past actions, the benefits of those in or near are likely to be protected, except perhaps for wealthy beneficiaries. Younger people and the wealthy are likely to bear the brunt of tax increases and benefit reductions.
If Congress fails to act, it would be better to have a benefits cut imposed on the higher benefit level available by waiting to claim benefits than the lower level received by claiming benefits early. Social Security’s financial troubles aren’t a good reason to accelerate benefits.
Misunderstanding longevity. Anyone who lives past average life expectancy is going to receive more in lifetime benefits by waiting to claim the benefits than by claiming earlier. Most people underestimate their life expectancy or don’t want to gamble that they’ll live to at least average life expectancy.
Social Security is longevity insurance. It’s official name is “old-age insurance.” It’s insurance against the possibility of living a long time. As people age, their other assets and income sources tend to be reduced or lose purchasing power to inflation. Social Security is guaranteed for life and inflation-indexed.
As retirement goes on, Social Security becomes a more important financial resource to retirees and many wish they’d waited to claim so their benefits would be higher.
Failure of spouses to coordinate and take the long view. In most married couples, each spouse tends to claim benefits at retirement or when he or she concludes it’s the right time to claim benefits. Only infrequently do spouses consider which decision would maximize the couple’s joint lifetime benefits and, especially, what the consequences will be after one spouse passes away.
When both spouses are living, two Social Security benefits are coming into the household. After one spouse passes away, only one benefit comes into the household. The surviving spouse most often receives the higher of his or her benefits or what the other spouse was receiving or entitled to receive at the time of death.
It often makes sense for the higher-earning spouse to delay benefits for as long as possible, ideally to age 70. That ensures the surviving spouse, whichever spouse it is, will receive the highest benefit possible. When both spouses claim benefits early, the surviving spouse will receive a fraction that would have been possible if the higher-earning spouse had delayed claiming benefits. When only one benefit is coming into the household, the surviving spouse will really feel the difference in benefits.
Not knowing a surviving spouse’s options. A surviving spouse, particularly one between ages 60 and 70, has more options and flexibility than other Social Security beneficiaries. Unfortunately, many don’t know these options and Social Security does a poor job of helping them.
In a series of reports since 2015, the Inspector General of the SSA documented how the SSA routinely failed to follow its policies to help several types of beneficiaries maximize their benefits. Surviving spouses were the ones let down by SSA in most of the reports, and the agency’s performance hasn’t improved much over the years.
Surviving spouses need to understand all their options and carefully analyze the choices. There’s enough money at stake to make it worthwhile to work with a financial advisor who’s familiar with the rules.
Not crunching the numbers. Many people make their Social Security claiming decisions using intuition or by asking friends for advice. But there are a lot of variables in the Social Security claiming decision, and it’s best to use a robust Social Security calculator to compute the lifetime benefits under different scenarios
In my book, Where’s the Money: Secrets to Getting the Most out of Your Social Security, I cite several studies that found a retirement nest egg lasts longer when Social Security benefits are delayed, even if that means drawing on retirement savings to fund the delay in claiming Social Security benefits. That advantage isn’t intuitive to many people, which is the case with many Social Security decisions.
A number of Social Security calculators are available online at reasonable prices, including on the SSA web site. Before making a decision, it’s a good idea to use one or more to compare your options.
Social Security benefits are one of the most valuable assets available to many Americans. Their value over a lifetime can be increased by making the right decisions about claiming benefits.