There is a simple way to quickly increase your pension security, but far too few retirees do this.
According to a new research report, nearly all Americans would have to wait past age 65 to claim their full Social Security benefits, while more than 90% would have to hold out until age 70, when they get even more. But only 10% wait until 70.
The advice comes as Americans live longer, face retirement that could take more years than expected, and encounter unexpected events that can make procrastination more difficult, even if it means more money.
“America is facing a pension crisis. Far too many baby boomers are retiring far too early and have far too few savings,” Laurence Kotlikoff, a professor of economics at Boston University and one of the report’s authors, told Yahoo Money. “They can alleviate, if not eliminate, this problem. They just need to make decisions about collecting Social Security that optimize their lifetime benefits — something almost no one does.
How procrastination can help
Your retirement may take much longer than you think.
According to The Society of Actuaries (SOA), today a 65-year-old man of average health has a 54% chance of reaching the age of 85. For a 65-year-old woman, the chance of living to 85 is 65%. And one in three 65-year-old men in average health has a chance of living to be 90. Nearly half of women aged 65 who are in average health are likely to live into their 90s.
That means your retirement savings should last a long time, and Social Security can help with that.
Suppose you turn 62 in 2022, your full retirement age is 67, and your monthly benefit from full retirement age is $1,000. If you start receiving benefits at age 62, the Social Security Administration reduces your monthly benefit by 30% to $700 to account for the longer time you receive benefits. This drop is usually permanent.
If you choose to defer receiving benefits until age 70, you will earn deferred retirement credits, which equate to an annual increase of approximately 8% per year for each year between your full retirement age until you turn 70 when the credits expire. no longer be built. That would increase your monthly benefit to $1,240.
The benefit at age 70 in this example is about 77% more than the benefit you would receive each month if you received benefits at age 62 — a difference of $540 per month.
This is a significant amount, especially since Social Security is a major source of income for nearly two-thirds of retirees, according to the Employment Benefit Research Institute’s (EBRI) Retirement Confidence Survey 2022.
Not only will you be rewarded with bigger checks by waiting until age 70, but the “benefits are tied to the consumer price index,” David Blanchett, chief of retirement research at PGIM DC Solutions, told Yahoo Finance. “It’s a great way to hedge both inflation risk and longevity risk.”
For example, Social Security benefits will increase by 8.7% next year as part of the Annual Cost of Living Adjustment (COLA) for 2023.
“Today’s inflation in particular is making people who weren’t interested in delaying claiming Social Security consider it,” Blanchett said. “It gives them an option to hedge against future inflation increases.”
Why people don’t wait
Sure, life events like job loss and health issues often prevent older Americans from deferring Social Security, and economic conditions like a swooning stock market and recession worries may also convince some to claim sooner than they should to avoid tapping into bills that have lost value. .
“Most people claim benefits when they need them,” Linda Benesch, director of communications at Social Security Works, told Yahoo Money. “The most common age to claim benefits is 62 because many people – especially those who have been pushed out of the workforce or forced to take lower-paying jobs due to factors such as age discrimination and an inability to do physically demanding work – cannot afford to to wait.”
About half of Americans take Social Security before their full retirement age (FRA), which ranges in age from 66 to 67, Martha Shedden, president of the National Association of Registered Social Security Analysts (NARSSA), which has more than 3,000 advisers trained on how to help their clients make optimal Social Security decisions, Yahoo Money told WebMD.
Of the 50% who receive benefits before their FRA, a quarter are men and just under a third of women take Social Security once they qualify at age 62, she said.
“While many cannot afford to wait, other reasons include the myths, misunderstandings, and untruths about how the Social Security program works. This can evoke feelings that they ‘miss’ if they don’t claim quickly.” Shedden said. “We have the highest COLA increase in four decades and some people may think that if they don’t cash in, they won’t benefit from that increase. Not true.”
In fact, the annual Social Security COLA will be applied to your benefit amount, even if you haven’t filed a claim yet.
You can help reduce your benefit in three steps
One way to get a reprieve is to stay at work as long as possible.
“If you can put off your retirement for a while, even if you can hold out for another six months, another year, another year and a half if you can, that gives you a chance to put off Social Security and put the money in your retirement account. to leave. to keep growing because you contribute to it,” Jean Chatzky, CEO of HerMoney.com told Yahoo Finance.
You can also choose to tap into other investments or retirement accounts to help you out. Or look for ways to generate money by downsizing your home. You can move to a location where the cost of living is lower.
“This issue of running out of money when we retire is not one that we have educated people about nearly enough,” Chatzky said. “We have been talking for years about the need to build up money for retirement. But the issue of running out requires a strategy, because we are talking about a period of retirement that could be 30 or 40 years.”
There are two online tools that can help you run the numbers. The Social Security Administration calculator compares retirement benefit estimates based on your selected date or age to start receiving benefits with retirement estimates for 62, full retirement age (FRA), and 70. AARP’s Social Security Calculator walks you through the math of when to apply for benefits and how much you’ll get.
For Kotlikoff, one of the biggest stumbling blocks that pushes retirees to turn on their Social Security benefits as soon as they qualify is their reluctance to spend other savings accounts first, especially tapping into money invested in their retirement accounts. such as 401(k) plans.
“They think they’re going to kill the market one day,” he said. “That’s largely Wall Street convincing them to leave it at that and the reward will come. It could be. But if you have the planning and patience to wait, you certainly can’t count on the kind of returns you’ll get on Social Security checks for the rest of your life.
Kerry is Senior Columnist and Senior Reporter at Yahoo Money. Follow her on Twitter @kerryhannon
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