You’ve probably heard that it’s ideal to wait as long as possible to claim Social Security benefits, ideally until age 70.
But it turns out that only 10% of Americans actually wait until then to claim their benefits, according to an analysis from the Bipartisan Policy Center. Nearly a third claim at 62, which is the earliest age at which you can claim benefits. The majority start collecting before their full retirement age, which is based on the year you were born.
For many people, delaying benefits will increase monthly payments substantially through delayed retirement credits. For every year past your full retirement age that you wait to claim benefits through age 70, your benefit will jump by as much as 8%.
For instance, someone who’d get $2,100 at age 62 could receive $3,720 by waiting until 70. Those bigger checks can provide more financial protection if you live longer than expected.
So, are early claimers making a mistake?
Not necessarily, says Derek Tharp, an associate professor of finance at the University of Southern Maine and founder of Conscious Capital.
Writing in The Wall Street Journal, Tharp argues that the standard advice to delay overlooks some real downsides. He points to questionable assumptions in many financial planning models that may not reflect how retirees actually invest or spend their money.
The following risks of waiting to claim Social Security deserve attention.
Mortality risk
It’s a tough question, but it’s important to consider: What if you don’t live as long as you expect?
The Social Security benefit formula is designed to be actuarially neutral. That basically means that you should receive roughly the same total amount over your lifetime, regardless of when you start claiming.
So if you claim early, you get smaller checks for more years. And if you wait, you get bigger checks for fewer years.
But if you pass away earlier than the average person, you’ll leave substantial money on the table — potentially hundreds of thousands of dollars.
According to the Social Security Administration (SSA), the average life expectancy for a woman turning 65 this year is about 87, and a man turning 65 this year can typically expect to live to about 85. Remember that those are just averages, though. Your personal health history and family longevity will come into play.
Sequence of returns risk
If the market tanks shortly after you retire and you’re taking withdrawals to cover living expenses while delaying Social Security, you could be forced to sell investments at depressed prices.
This can permanently reduce the size of your nest egg.
This is what sequence of returns risk refers to — the danger of experiencing poor investment returns early in retirement, right when you’re starting to withdraw money from your portfolio.
Tharp notes that if you’re waiting to claim Social Security until 70, you’ll need to take larger withdrawals from your retirement accounts to cover those extra years of expenses. And if the market performs poorly during that period, those withdrawals can significantly damage your portfolio’s long-term growth potential.
Loss of spending flexibility
If you wait to claim your Social Security benefits, you could end up draining your investment accounts. As a result, you’d lose flexibility.
Social Security benefits arrive as fixed monthly payments. You can’t ask the SSA for a lump sum if you suddenly need cash for a major expense, like a medical bill, home repair or other emergency.
But if you claim Social Security earlier and maintain more money in your investment portfolio, you can give yourself options, such as accessing larger amounts when you most need them.
Underspending
There’s another risk of waiting to claim benefits that Tharp identifies, and it involves the psychology of spending in retirement.
Tharp cites a recent study from the Retirement Income Institute that found retirees spend about 80% of guaranteed, predictable lifetime income sources like Social Security, pensions, and annuities. But they spend only about 50% of their portfolio income.
In other words, people are more reluctant to tap their investment accounts than to spend their regular benefit checks. This behavioral tendency means delaying Social Security to get a bigger monthly check might actually lead to underspending in retirement.
Tharp says that claiming benefits earlier, even for smaller monthly payments, could be one solution to a more enjoyable retirement:
“If claiming Social Security earlier can help people overcome this psychological hurdle, then it’s a strategy worth considering.”
Ultimately, the decision of when to claim Social Security isn’t one-size-fits-all. While delaying works well for many people, it’s worth considering these often-overlooked risks as part of your personal retirement strategy. It’s also worth talking to a vetted financial advisor to explore what will work best for you.
Discover reasons why claiming earlier may be your smartest retirement move in “5 Groups Who Are Better off Claiming Social Security Early.”
And to learn why it might be better to wait, check out “7 Reasons Not to Take Social Security at Age 62.”
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