Why is it worth waiting to claim Social Security retirement benefits?

The first Social Security check was issued 83 years ago. A check for $22.54 went to retired legal secretary Ida Mae Fuller of Ludlow, Vermont.

Today, in 2023, the average retirement benefit is $1,827 a month, according to the Social Security Administration.

The maximum Social Security benefit for a retiree at full retirement age is $3,627 per month. Full retirement age currently ranges from 66 to 67, based on date of birth.

How much you collect in retirement is largely based on how much you earned during your career.

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But there is a way you can increase the monthly checks you receive by deferring benefits.

Recent research shows that all US workers between the ages of 45 and 62 would benefit if they waited until age 65 or older to start receiving benefits.

Whereas more than 90% would benefit from waiting until age 70.

But only 10% of workers actually wait until then, according to estimates by Boston University economics professor Larry Kotlikoff, Federal Reserve Bank of Atlanta executive vice president David Altig and Opendoor Technologies research scientist Victor Yifan Ye.

The researchers found that claiming before age 70 results in an estimated household loss of $182,370 in lifetime discretionary expenses for claimants ages 45 to 62.

“The payback for patience is huge with Social Security,” Kotlikoff said.

Eligibility for Social Security retirement benefits begins at age 62 for workers who have earned 40 credits or 10 years of qualifying service.

Employees and employers each pay a 6.2% payroll tax toward Social Security. In 2023, that tax applies to gains up to $160,200.

Those payments count toward Social Security retirement benefits that workers can claim later in life. In general, the higher your lifetime earnings, the higher the benefits you can receive.

Retiring early can also affect the size of your monthly check.

Those turning 62 this year would see their benefits cut by about 30% to claim now, compared to waiting until their full retirement age of 67, according to the Social Security Administration.

For each year delayed beyond full retirement age, 8% is added to Social Security benefits.

There are certain advantages to waiting to claim. By waiting until at least age 65, retirees can ensure they are eligible for Medicare coverage.

At full retirement age, workers must receive 100% of their earned benefits.

By waiting longer, until age 70, retirees can receive larger benefits, which is especially valuable if they live longer than expected.

The study found that retirement benefits at age 70 are 76% higher, adjusted for inflation, than those at age 62. This is true even as the retirement age gradually rises to 67.

The cost of waiting claims applies to households with a range of financial resources.

“The rich have the most to lose by overturning this decision,” Kotlikoff said. “But the poor have relatively more to lose because they depend more on social security.”

Three-quarters of workers who live to age 85 would benefit by waiting until age 70, the study found.

Because of the high cost of waiting for claims, workers should do what they can to delay, including withdrawing from retirement accounts early, working longer hours or downsizing their homes.

The return on waiting to claim Social Security benefits can also exceed stock market returns, which are too risky, Kotlikoff noted.

“You have to beg, borrow and steal to avoid taking your benefits early,” Kotlikoff said.

But there is one caveat. for those who expect to die sooner, it may make sense to claim early. However, those claimants still need to consider the value of the benefits they can pass on to their loved ones through survivor benefits.

“Even so, the dependent spouse benefit may be such that you want to wait to collect so they can have a higher widow’s or widower’s benefit,” Kotlikoff said.

Research from JP Morgan Asset Management also points to the cost of waiting to claim Social Security. The company’s research found that workers often retire early due to health problems or disabilities and company downsizing.

Those who are not working and have no other sources of income may want to consider claiming their benefits early, the research suggests.

The same goes for those who don’t expect to live past age 77, who may want to receive benefits at age 62, or those who don’t expect to live past age 81, who may want to consider claiming their full retirement age, according to JP Morgan’s.

According to Kotlikoff’s research, about 13% of retirees are completely dependent on Social Security for retirement income. About 40% of retirees depend more than 50% on these benefits.

It’s true that lower-income workers may find it difficult to wait until 70 or even full retirement age to claim retirement benefits.

The good news for them is that the program is very advanced, so it will replace a larger share of their income.

“Lower-income workers, as a percentage of their income, get more out of the plan,” said Sharon Carson, pension strategist at JP Morgan.