This Common Social Security Strategy Could Cost You $182,000


Americans are fascinated by the idea of ​​getting the most out of Social Security, but many retirees make a strategic mistake that can cost them tens of thousands of dollars in lifetime benefits, according to a new study by economists. ‘Boston University and the Federal Reserve Bank of Atlanta.

The analysis examines the question of the optimal age to apply for Social Security in order to maximize retirees’ lifetime discretionary income, or money after taxes, living expenses, and other essential costs. The Social Security Administration pays a worker’s full benefits at what it calls “full retirement age,” which ranges from 66 to 67, depending on your year of birth.

But people can also apply for Social Security as soon as they turn 62, in return for a 25% reduction in their monthly checks. On the other hand, if workers wait to take Social Security until they turn 70, they get a 32% increase in their payments in exchange for a suspension.

The reality, however, is that only 6% of American workers wait until they are 70 to claim Social Security, even though the vast majority would be better off waiting until then to trigger their retirement benefits, the researchers found.

$182,000 hit

There’s a very real price to claiming Social Security too soon, as the typical worker leaves about $182,000 of lifetime discretionary income on the table by claiming before age 70, the report notes — an income that most Americans could hardly use shelters since many not saved enough to carry them into old age.

According to data from the Social Security Administration, nearly half of Americans claim Social Security before reaching full retirement age and about a quarter at age 62.

Americans “have to change their way of thinking,” Laurence J. Kotlikoff, one of the study’s co-authors and a professor of economics at Boston University, told CBS MoneyWatch. “They think they’re going to die tomorrow, and that leads people to jinx themselves for saying too soon.

Some people decide to apply for Social Security sooner based on the average life expectancy of people over 65, which is 83 for men and 85 for women. But a better rule of thumb is to consider what Kotlikoff and his co-authors call “the worst outcome, financially speaking” — living to the peak age of life, which could be in the 90s or even 100.

The bottom line is that “we can’t count on dying in time,” said Kotlikoff, who writes about retirement at Maximize My Social Security and is co-author of “Get what’s yours“, a guide to the Social Security program. Instead, Americans should use financial strategies that can help them delay their application for Social Security, which will increase their lifetime discretionary income, he said.

“To find a job”

Nearly half of Americans over 55 have no retirement savings, meaning these workers will be more dependent on Social Security in their old age and may be tempted to claim early in order to have a stream of regular income when they turn 62.

But Kotlikoff said people who remain physically active at age 62 should stay in the workforce rather than claim Social Security because by maximizing their benefits, they’ll be better off in the long run. The only people for whom it might make sense to claim early are people with terminal illnesses or who are disabled, he added.


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“Most people who retire early are able-bodied, so for those people it’s a fantastic job market – they should go get a job and work,” he said. “The fact that we’re retired longer than we’re working is crazy.”

In addition to working longer, there are a number of other strategies workers can use to delay claiming Social Security until full retirement age or beyond. For one, people with retirement savings in a 401(k) or other accounts can withdraw that money first, he noted. Cost-cutting measures like moving in with relatives or taking out a loan from a family member can also help you weather the storm until you hit 70.

Save more

Of course, a setback to waiting to claim Social Security is a reduction in possible cash flow when someone is in their 60s, the paper notes. But the analysis found that the impact of the Social Security backlog on household cash flow may not be as large as some fear.

“We found that [waiting to claim Social Security] cuts people’s spending to the median of 7% — the message being that people think they’d have nothing to live on, but a lot of people have resources “beyond Social Security, Kotlikoff said.

Overall, Americans also need to put a lot more money aside for their old age, he added. People think they’ll need to save $1.25 million to ensure a comfortable life in their golden years, according to a recent study by Northwestern Mutual. And yet, the typical American retirement account holds less than $87,000.

“People rely on Uncle Sam and their employer to take care of them, and we’ve seen the consequences,” Kotlikoff said. “It’s time for some tough love.”


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