Financial planners have been advising us to wait as long as possible to collect Social Security to maximize the benefit. A new study finds that many middle-income workers haven’t heeded that call. They were more likely than higher earners to claim their benefit early and live on a permanently reduced payout for the rest of their lives.
According to a Government Accountability Office (GAO) study, workers took their benefit early for a variety of reasons: They didn’t expect to live past 75; they were chronically unemployed or underemployed and needed the income; or they tapped their benefit early due to work-related factors or other situations.
For instance, workers who held physically demanding blue-collar jobs at ages 60 to 62 were 55 percent more likely to claim their Social Security benefit early. The same held true for people who had put in at least 35 years on the job by the time they reached ages 60 to 62. They were 38 percent more likely to tap their benefit by age 62, the GAO report said.
On the flip side, workers in managerial or professional jobs at ages 60 to 62 were more inclined to delay collecting their benefit, the GAO report said.
AARP senior strategic adviser Sara Rix pointed out another possible motivation for claiming early: Social Security replaces a higher proportion of pre-retirement earnings of lower-wage workers than of higher-wage employees. The weighted benefit formula is based on the assumption that higher-wage workers have more options (with better pay, perhaps a pension) to set aside money for retirement on their own than their lower-wage counterparts.
Still, Rix says, not everyone has a choice about when to take their retiree benefit.
“For many workers — especially the unemployed and those in physically demanding jobs — Social Security is a lifeline, a guaranteed source of inflation-protection income that they can count on until they die. And their spouses can count on it as well,” Rix says. “That is what early benefits are for.”
For workers in jobs “that are conducive to working longer, it can make sense to wait to collect Social Security,” she says. “Monthly benefits increase, and those higher benefits can be very important later in life when other sources of income are diminished and going back to work is not an option. Plus, benefits for surviving spouses will be higher.”
Determining when to take Social Security can be the most important financial decision a retiree makes. For every year folks delay collecting a benefit, from ages 62 and 70, the amount will rise by about 8 percent. Or put another way, a 62-year-old who claims an early benefit in 2014 will get 25 percent less each month than if a benefit was claimed at age 66.
Generally, the earliest one can collect a retiree benefit is at age 62. The full retirement claiming age rises to 67 for people born in 1960 or later.
The GAO, which conducted the study in part to examine why people claim their benefit early, showed that waiting to collect a benefit boosted workers’ ability to live comfortably through the early years of retirement. It said households in which workers delayed claiming Social Security until at least their full retirement age had a 45 percent higher median income (that’s after claiming their benefit) than those who took it early — $71,907 compared with $49,612 annually. By the time they reached age 72, the workers who delayed their benefit had a 33 percent higher median income than those who took it early.
It all evens out in the end, the report said, assuming you live to an average life expectancy. At that point, the lifetime benefit amount you receive should be about the same regardless of the age at which you began benefits.
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