Work. Retire. Get your monthly Social Security checks. The process seems simple. And that’s it – for the most part.
However, the reality is that there are some important decisions to be made along the way regarding Social Security. Some have major consequences. There is one Social Security mistake that can actually cost you $182,000.
The early bird doesn’t get the worm
You might think that the $182,000 number couldn’t possibly be true. But it is for many Americans, according to a working paper recently published online by the National Bureau of Economic Research (NBER).
David Altig of the Federal Reserve Bank of Atlanta, research associate Laurence Kotlikoff of Boston University, and Victor Yifan Ye, a research scientist at Opendoor Technologies, conducted a detailed analysis of the economic costs of claiming Social Security benefits early. They discovered that the old adage that the early bird gets the worm was wrong.
The article published by NBER determined that nearly every American between the ages of 45 and 62 should wait until at least age 65 to begin receiving Social Security benefits. More than 90% of these people should wait until the age of 70.
However, few of these Americans wait until age 70 to collect Social Security benefits — just 10.2%, according to Altig, Kotlikoff and Ye. The researchers found that early Social Security claimants paid a high price: The median lifetime loss from not waiting until age 70 was $182,370.
If waiting is not the best option
These numbers don’t lie. For many Americans, there is a really significant cost to receiving Social Security benefits before age 70. However, are there cases where waiting to claim benefits is not the best financial option? Absolute.
Probably the best reason to take Social Security at age 62 is if you are facing serious health issues. Any analysis of when to claim benefits should include life expectancy.
The Social Security Administration’s actuarial tables predict that the average man who reaches age 62 will live another 20 years. These tables estimate that the average 62-year-old woman will live another 23 years. If your health condition makes it likely that your life expectancy will be shorter than these projections, it may be a good idea to claim Social Security retirement benefits early.
Some wealthier individuals do not need Social Security checks to live a comfortable lifestyle during their retirement years. They could still receive benefits before full retirement age and invest the money. It is possible that their return on investment is greater than the amount they would have earned by waiting to receive Social Security benefits.
Of course, some people are willing to accept the negative financial consequences of claiming Social Security benefits early. They believe that the benefits of early retirement are worth the price they pay.
When to claim Social Security benefits is one of the most important retirement decisions you will ever make. As the article published by NBER shows, waiting until age 70 makes financial sense for most Americans. However, procrastinating for that long can be unappealing if it means working longer than you’d like.
In the end, everyone has to decide what is best for them. Whatever you do, plan carefully. Your decision may incur costs.