Wealth Does Not Eliminate the Risk of Early Claiming: High-net-worth individuals often claim Social Security benefits early due to misconceptions or fear, potentially missing out on higher lifetime benefits.The US Sun+1Rethinking65+1
Delaying Benefits Can Significantly Increase Lifetime Income: Postponing Social Security claims until age 70 can substantially boost monthly payments, serving as effective longevity insurance, especially for those with longer life expectancies.Rethinking65+2MarketWatch+2Rethinking65+2
Comprehensive Financial Planning Is Essential: Advisors should incorporate Social Security strategies into holistic retirement plans, considering factors like life expectancy, other income sources, and personal goals to optimize benefit timing.
An enduring question for individuals nearing retirement — and financial advisors guiding older Americans towards a secure financial future — centers on the optimal time to begin collecting Social Security payments from the U.S. government.
With a new working paper released this year, the Center of Retirement Initiatives at Georgetown University’s McCourt School of Public Policy aims to give households and advisors added insights on how filing for Social Security payments can impact an individual’s financial well-being.
“The Social Security claiming timing is amongst the most important household decisions that older Americans make,” said Manita Rao, senior advisor with the AARP Public Policy Institute, explaining one of the reasons for the study she co-authored. “Nearly three-quarters of older Americans are very concerned about their retirement security and are unsure about whether they have adequate savings to tide them over retirement.”
Rao, who is also a non-resident scholar at the center, laid out some of the details of the report, “Social Security Claiming Timing and Older Adults’ Financial Well-being” during an eponymously named webinar present by the center on April 30. The 61-page report’s other co-author is Zeewen Lee, assistant professor at Lee Kuan Yew School of Public Policy at the National University of Singapore. The study included 170,000 respondents between the ages of 62 to 85 years old. The study determined the optimal claiming age for most individuals is between 67 and 68 years old.
Rao said other factors behind the study are that the United States has a rapidly aging population as the Social Security system faces some solvency issues, and that limited research exists on understanding the long-term financial impact of the timing of an individual’s claim. Using a set of control variables and data inputs, the new study created an optimization failure index. which measures the difference between optimal and observed timing of claims.
This index was used as the main predictor to assess the effect of claiming timing on a person’s financial outcomes in four indicators of post-retirement financial well-being: liquid assets, pension wealth, real estate wealth and total household wealth.
Poor Timing Can Impact Real-Estate Wealth
One key takeaway is that suboptimal claiming is associated with a decline in real estate and total wealth but also improves cash flow after claiming. The study also finds that these outcomes are more prominent among individuals who claim early, when compared with those who claim late.
“What this seems to indicate is that those who are claiming suboptimally early are drawing on some form of real estate equity to substitute for the lower Social Security benefits that they received,” said Rao. While suboptimal claiming seems to be easing short-term financial needs, it can come at the cost of long-term financial wealth and even intergenerational wealth, as real estate wealth is the one primary source through which intergenerational economic mobility and wealth transfer happens, she said.
Deciding When to Claim Benefits Has Become a High-Stakes Decision
Sita Slavov, professor of public policy, George Mason University in Fairfax, Virginia, said the report is important as Social Security is the largest source of retirement income for most people. The claiming decision has increasingly become a high-stakes choice over the past few decades with improved life expectancy and the increased generosity of the delayed retirement credit for benefits delayed beyond full retirement age. Slavov said the study’s analysis has carefully considered both factors.
A delay in claiming is equivalent to buying an inflation-index annuity on relatively generous terms. “Essentially what you’re doing is you’re giving up current benefits in exchange for higher inflation-adjusted benefits for life, and that annuity is offered on relatively generous terms,” she said, adding the decision can “impact well-being far down the road.”
Slavov said the study’s definition of suboptimal claiming is very specific: Failing to maximize expected net present value. Individuals could deviate from that choice if they face liquidity constraints. For example, a person who wants to stop working at age 62, but is without other sources of retirement income. Yet even people who are not liquidity constrained may claim suboptimally early: An individual who wants their spending to decline over their retirement or enjoy consumption when healthier and younger.
Others may be responding to Social Security rules. For example, starting with the 1954 birth cohort, the only way for a spouse to claim a spousal benefit based on an individual’s record would be for the individual to claim his or her own benefit. Others may be motivated by bequest motives and prefer to use Socials Security rather than draw down on their non-Social Security wealth.
Waiting to Claim Provides Bonuses
Mary Beth Franklin, CFP, a longtime journalist and founder of RetirePro, said “those people who are essentially healthy enough and wealthy enough to delay claiming benefits” can receive a huge bonus by postponing their benefits claim beyond full retirement age, up until age 70. “That bonus is an extra 8% per year,” she added.
And by creating the largest benefit possible each year, an individual’s annual cost-of living adjustment percentage is applied to a larger base. Acknowledging that some people are worried that the Social Security trust funds may become exhausted in the next 10 years, Franklin said “that does not mean Social Security is going broke.”
Yet lawmakers need to “step up in the next decade” and develop a solution that will probably include revenue increases and maybe benefit changes, she said. She cautioned people who are eligible for Social Security now and considering claiming benefits early because of worry about the system running out of money. “I don’t think that’s such a good idea. It’s a bit like selling your stock portfolio in a down market,” she said. “The only thing you have guaranteed is you have locked in a loss.
“So, if you need Social Security benefits early because of your health or your finances, go ahead and claim it,” Franklin said. “But if you’re claiming early out of fear, I don’t think that’s such a good idea.”
Joel Eskovitz, director of Social Security and savings for the AARP Public Policy Institute, agreed that individuals should not base the timing of a claim on the uncertainty surrounding the Social Security program. He said he felt it was unlikely, even in the current political climate, that benefits would be cut by 17% in one fell swoop in one year.
“I recognize in this environment, in this particular administration, that still may be something that is causing some panic,” he said, “but it would be a political challenge, I think, for members of Congress to sit by and watch that happen to their constituents.”
Paula L. Green is a New York City-based freelance journalist with more than three decades of reporting and editing experience that spans coverage of international business and finance issues to murders and politics at the Jersey Shore to presidential press conferences in Argentina and Mexico. She can be contacted by plgreen12004@gmail.com. To read more of her articles, click here.
