Why People Don’t Wait to Apply for Social Security and What the Experts Say

When it comes to applying for Social Security retirement benefits, experts agree that it’s usually best to delay.

However, many people continue to apply for their pension early, either as early as possible, at age 62, or before full retirement age.

These early claims result in reduced Social Security benefits for life.

To receive 100% of the benefits you have earned, you must wait until full retirement age, which is between 66 and 67, depending on your date of birth.

To receive the highest benefit, retirees must wait until age 70.

Learn more about personal finance:
As Social Security funds face insolvency, here’s what to watch
Why Most of Warren Buffett’s Wealth Came After Age 65
Advice regarding 401(k) rollovers is about to experience a big change. here’s why

Naturally, some people can’t wait – either due to poor health or their financial situation.

Yet research also shows that many people apply early because they are worried about the future of the program or because they want to get the most out of their benefits.

In response to a recent CNBC article explaining why even waiting a few months to claim benefits can help, some readers had a strong reaction.

“This is already highway robbery,” wrote one reader. “You just don’t want them (the government) to get their money back, do you?”

Nonetheless, experts argue that waiting to claim is generally a beneficial strategy.

“Overall, delaying claiming Social Security benefits is one of the safest things you can probably do to protect yourself over time,” said David Blanchett, head of retirement research at PGIM DC Solutions, the global investment management business of Prudential. Financial.

Here’s What Experts Say About the Most Common Arguments for Applying for Social Security Benefits ASAP.

“If an individual begins collecting at age (62) and places the proceeds in an S&P index fund for 8 years, that individual would be well ahead of delaying collecting until age 70 years,” another CNBC reader wrote.

With the S&P 500 index rising about 26% Over the past year, it’s tempting to think that simply investing in a fund that tracks this index might make more money than delaying Social Security.

But there is no guarantee that returns will be high.

Although markets can grow an average of 10% per year, that’s only 7% after accounting for inflation, according to Blanchett. For a balanced portfolio of stocks and bonds, an annual return expectation of 5% is more reasonable. Some years the market may do better and others worse.

A person who waits until age 70 to apply for Social Security benefits will receive a benefit about 77 percent higher than what they would receive at age 62, according to Blanchett’s research. For each year behind full retirement age, retirees can receive an 8% increase in their benefits.

To better assess the trade-off, experts say it’s more accurate to compare deferring Social Security to investing in bonds rather than stocks. The advantage of Social Security benefits is that they are adjusted for inflation and pay income for the rest of the recipient’s life.

“If I had to compare Social Security, I would have to compare bond yields,” said Joe Elsasser, a certified financial planner and founder and president of Covisum, a Social Security claims software company.

“If I compare it to bond yields, then suddenly delaying Social Security seems a lot more reasonable,” he said.

“You can’t pass your Social Security on to your heirs while your 401(k) can, so it’s better to take Social Security earlier and withdraw less from your 401(k),” wrote one CNBC reader.

When planning how to coordinate Social Security with other assets, it’s important to consider how other factors, such as longevity and taxes, will affect your retirement income.

“People notoriously underestimate their own life expectancy,” Elsasser said.

If you live longer, larger Social Security benefit checks will help preserve your standard of living, which can help protect other assets in your later years.

For tax efficiency reasons, it generally makes sense to delay Social Security, Elsasser said.

Withdrawals from traditional 401(k) plan accounts may be treated less favorably than Social Security, where only up to 85% of benefits are subject to federal taxes.

Therefore, it helps to have more Social Security income.

“For many people, delaying Social Security can create a much more tax-advantaged overall retirement, even if it is not in the short term,” Elsasser said.

“The person who retires at 62 will have the same amount (of money) as the person who retires at 72 by the time they both reach 78, their expected date of death,” another reader wrote from CNBC. “You will only get through this if you defy the odds and live longer.”

Many Social Security claimants tend to focus on a “break-even age” – the point at which they would personally earn the same amount if they delayed or claimed early.

To benefit from deferred application, they would have to live beyond their estimated break-even age.

Still, experts say it’s better to base a claims decision on an individual’s entire financial situation rather than just one parameter.

The break-even age can be a valuable reference point, Elsasser said.

But applicants also need to consider their own longevity, he said, which could be better than that of their parents thanks to improved health care and financial resources.

According to Elsasser, when couples make a claims decision, a higher-wage earner must consider the longevity of both individuals, which often also justifies a delay in applying for benefits.