‘It’s already a highway robbery.’ Why people don’t wait to claim Social Security and what experts say

Personal finance

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When it comes to claiming Social Security retirement benefits, experts agree it’s generally best to delay.

Yet many people still claim early — either at the earliest possible age of 62 or before their full retirement age.

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

To get 100% of the benefits you’ve earned, you need to wait until full retirement age — between age 66 and 67, depending on your date of birth.

To get the highest benefit, retirees need to wait to claim until age 70.

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Understandably, some people cannot delay — either due to poor health or financial circumstances.

Yet research also shows many people claim early because they are worried about the program’s future, or they want to get the most of their benefits.

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

“It’s already highway robbery,” one reader wrote. “You just don’t want them [the government] getting their money back, do you?”

Nevertheless, experts maintain waiting to claim is generally a beneficial strategy.

“In the grand scheme of things, delaying claiming Social Security is one of the safest things that you could 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 to the most common arguments for claiming Social Security benefits as soon as possible.

Investing in the market

“If an individual starts collecting at age [62] and puts the benefits in a S&P index fund for 8 years that individual would be way ahead of postponing collection until the age of 70,” another CNBC reader wrote.

With the S&P 500 index up about 26% in the past year, it is tempting to think just investing in a fund that tracks that index can bring in more money than delaying Social Security.

But there are no guarantees returns will be high.

While the markets may go up an average 10% per year, that amounts to just 7% after factoring in inflation, according to Blanchett. For a balanced portfolio of stocks and bonds, a 5% annual return expectation is more reasonable. In some years, the market may fare better and in others it may be worse.

An individual who waits until age 70 to claim Social Security benefits will receive a benefit of about 77% higher than what they would receive at age 62, according to Blanchett’s research. For every year retirees delay from full retirement age, they may get an 8% benefit boost.

To best gauge the tradeoff, experts say it’s most accurate to compare delaying Social Security to investing in bonds rather than equities. The advantage of Social Security benefits is that they are adjusted for inflation and pay income for the rest of a beneficiary’s life.

“If I were going to compare Social Security, I should be comparing to bond yields,” said Joe Elsasser, a certified financial planner and founder and president of Covisum, a Social Security claiming software company.

“If I were comparing to bond yields, then delaying Social Security all of a sudden appears much more reasonable,” he said.

Pass on money to heirs

“You can’t pass your Social Security onto heirs while your 401(k) can be, so [it’s] best to take Social Security early and withdraw less from your 401(k),” a CNBC reader writes.

When planning for 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, bigger Social Security benefit checks will help preserve your standard of living, which may help protect other assets in your later years.

For tax efficiency, 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.

Consequently, it helps to have more Social Security income.

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

Break-even age

“The person who withdraws at 62 will have the same amount of [money] as the person who withdraws at 72 by the time they both reach 78, their expected date of death,” another CNBC reader writes. “You only make out if [you] beat the odds and live longer.”

Many Social Security claimants tend to focus on a “break-even age” — the point at which they personally would make out the same if they delay or claim early.

To benefit from delayed claiming, they would have to live past their estimated break-even age.

Yet experts say it’s best to base a claiming decision on an individual’s entire financial situation rather than one metric.

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

But claimants also need to consider their own longevity, he said, which may be better than their parents’ due to improved health care and financial resources.

When couples are making a claiming decision, a higher wage earner needs to consider the longevity of both individuals, which often also supports delayed claiming, according to Elsasser.

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