Americans Lose Trillions Claiming Social Security at the Wrong Time
August 16, 2019
A lack of knowledge leaves individual retirees dumping thousands of dollars out of their own pockets.
The graph below says it all. The age at which most people claim Social Security (green line) is opposite to the age at which they should claim Social Security (purple line). According to The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions, “retirees will collectively lose $3.4 trillion in potential income that they could spend during their retirement because they claimed Social Security at a financially sub optimal time, or an average of $111,000 per household.”
Figure 1: Optimal vs. Actual Social Security Claim Ages
This comprehensive study observed 2,024 households, considering each household’s outside resources, spending, health, and longevity to determine how much income and wealth they would have if they had taken Social Security at the various ages of eligibility.
Although later claiming typically caused wealth to drop during a person’s 60s as they drew down their personal retirement accounts, this wealth drop was more than made up for by the late 70s, when Social Security income was higher.
In order to isolate the effect of claiming age, the study did not consider the effect of working longer. But in real life, a person who decides to maximize benefits by claiming at 70 might choose to work a few years longer, and this would mitigate some or all of the wealth drop in their 60s. This appears to be the first study of its kind to consider the impact of claiming age on not just the Social Security income, but other assets and income as well, as optimal Social Security claimingcan lead to higher account balances, which in turn generate more income. Only 4% of retirees make the optimal claiming decision.
The study found that a claiming age of 62–64 is optimal for only about 8% of adults (primarily those with short life expectancies or low-earning spouses)—yet about 79% of eligible adults in the sample claimed at those ages. A claiming age of 70 is optimal for 71% of primary wage earners—yet only 4% of the adults in the sample claimed at that age.
Among those at the highest wealth levels, 99% make suboptimal claiming decisions. Yes, you read that right. Ninety-nine percent of higher-wealth households make suboptimal claiming decisions. While it’s true that wealthy individuals can afford to leave Social Security benefits on the table, what’s troubling is that they are not getting good advice from their financial advisors.
Here at Boston Harbor Group, we pride ourselves for making this matter a very important one when elaborating the financial strategies for our clients. We show our clients calculator reports and different scenarios to reveal their personalized and optimal claiming time.
For retirees, financially suboptimal decisions add up to a loss of $2.1 trillion in wealth and a loss of $3.4 trillion in income. In its conclusion the report mentions a few ways to deal with this, including:
Make early claiming an exception, reserved for those who have a demonstrable need to claim benefits before full retirement age.
Change the way we refer to early or delayed claiming, labeling a claiming age of 62 as the “minimum benefit age” and 70 as the “maximum benefit age.”
Remove the disincentives wealth management firms have for delivering optimal claiming advice (i.e., the near-term drop in assets) by providing “cover” for executives to make the right financial decision for their clients and the right long-term decision for their shareholders.
Provide SSA with more resources, perhaps in partnership with third-party fiduciaries, to help households determine their optimal claiming age. “That limited investment could help recapture some of the $5.5 trillion lost in wealth and income to retirees and the U.S. economy because of the struggles retirees currently face making the right decision.”
MORE NONRETIRED AMERICAN EXPECT COMFORTABLE RETIREMENT
Meanwhile, a recent Gallup poll found that 57% of nonretired Americans now expect that they will live comfortably in retirement, a six-point increase in positivity since last year and the highest reading since 2004.
Only 33% of nonretirees see Social Security as a major source of income in retirement (compared to 57% of retirees). Eighteen percent of nonretirees aren’t counting on it at all. Instead, nonretirees tend to focus on 401(k)s, IRAs and other retirement savings accounts as being a major source of income. They also are planning on having multiple sources of income in retirement, including part-time work, home equity, and rent and royalties.