It’s no secret that retirees are often better off waiting to collect Social Security benefits. But how much money are people leaving on the table by getting benefits early?
A recent study funded by the Federal Reserve Bank of Atlanta finds that retirees often give up tens or even hundreds of thousands of dollars because they start collecting Social Security benefits too early. This takes into account that if a retiree applied for Social Security at age 70 instead of 62, the monthly pension could be 76% higher, adjusted for inflation.
The researchers looked at lifetime voluntary spending and found that nearly 90% of workers ages 45 to 62 would benefit if they waited until age 70 to collect Social Security. In fact, waiting would increase the average lifetime disposable expense of a typical worker by $182,370, or about 10%.
Yet fewer than 10% of retirees are likely to wait that long, the researchers said.
“It can be almost impossible to figure out when to collect payments, especially when someone is entitled to multiple benefits or needs to coordinate with a spouse,” says Laurence Kotlikoff, a professor at Boston University and one of the study’s co-authors.
The wealthiest 20% of people now aged 45 to 62 could increase their lifetime discretionary spending by almost $290,000 on average by waiting until age 70 to start collecting – an increase of about 2, 4%, the researchers found. And the 1% of people who benefit most from waiting to collect Social Security could see a lifetime increase of almost $600,000.
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But even less affluent retirees benefit significantly from waiting until age 70 to start Social Security, the study found. People ages 45 to 62 whose wealth and income place them in the bottom 20% of wealth could increase their lifetime discretionary spending by nearly $110,000 — an increase of about 15%.
To arrive at their findings, the researchers used three major datasets: the Federal Reserve’s 2019 Survey of Consumer Finances, the US Census Bureau’s annual American Community Survey between 2000 and 2020, and the Current Population Survey conducted by the Bureau of Census for the Bureau was carried out the labor statistics. The finances of 6,000 households were observed with the first dataset. The second two datasets were used to model different retirement dates.
The data was analyzed using a software program that accounts for numerous variables, including federal and state income taxes, federal and state benefits, and Medicare premiums, all of which play a role in how much money retirees actually have to spend.
If it’s no secret that waiting for Social Security pays off in the long run, why aren’t more people doing it?
A big problem is that this can mean financial losses in the short term. The authors found that 47% of the households in the study would have to reduce spending in the short term if they deferred receiving Social Security. According to Prof Kotlikoff, one solution could be for the government to consider allowing people to take some of their Social Security benefits earlier and some later so they can get the higher payout later.
Another problem is that many retirees don’t calculate the value of their Social Security benefits over a 30- or 40-year period because they think they won’t live that long. Financial experts and even guides on the Social Security website recommend that retirees use average death rates to estimate the value of their Social Security benefits and cash flow during retirement. But Prof. Kotlikoff says that “using averages is highly irresponsible”.
“It’s more important to think about how long you could possibly live,” he says, adding that when someone expects to live to 100, Social Security becomes a lot more valuable and maximizing utility becomes even more important.
Complexity is another big problem. Social security can include benefits for spouses, widows, divorcees, disabled children, orphans and parents, and trying to coordinate and maximize these benefits is difficult.
“Optimizing Social Security benefits is like thinking ahead 15 moves in a game of chess,” says Prof. Kotlikoff.
Ms. Ward is a writer based in Vermont. Email her at [email protected].
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