Nine in 10 working Americans say they plan to ignore one of the most common pieces of financial advice about Social Security: waiting until age 70 to claim benefits, which ensures higher monthly payments, according to a new study from investment firm Schroders.
Social Security allows employees to claim their benefits as soon as they turn 62, years before the so-called “full retirement age,” which now stands at 67. But claiming Social Security early has a tradeoff—it lowers your monthly payment by about 30%, with those lower benefits locked in for the rest of your life.
By contrast, delaying Social Security until age 70 results in a roughly 30% higher monthly payment than if you claimed benefits at age 67 — also locked in as long you’re collecting benefits. As a result, financial experts often recommend that seniors hold off as long as they can, with one study finding that filing early for benefits can cost $182,000 in foregone payments.
The Schroders survey suggests that many Americans who haven’t yet retired aren’t buying that advice. In the survey of 1,500 adults, most respondents said they understand the trade-offs of claiming early, but only 10% plan to wait until age 70, while 44% expect to file for benefits before they reach full retirement age.
“Not an oversight”
The disconnect illustrates the financial reality facing most workers, Deb Boyden, head of U.S. defined contribution at Schroders, told CBS News.
“The decision to sacrifice extra Social Security income is not an oversight for most Americans,” she said. “According to our research, 70% of Americans are aware that waiting longer to claim Social Security leads to higher payments, and yet so few are willing to hold off.”
Many retirees are facing a shortfall in their own retirement savings, a financial gap that’s been well documented as a growing share of Americans live paycheck to paycheck. Many workers “need the income generated by Social Security to meet their expenses immediately upon retiring,” Boyden noted.
Another new study, released Tuesday by the Allianz Center for the Future of Retirement, finds that a majority of Americans say they don’t know much about Social Security or how it will fit into their retirement plan. And about 1 in 5 believe Social Security will provide all the retirement income they need, even though it generally replaces only 40% of a worker’s wages when they retire, the study found.
There’s another reason why many Americans plan on claiming their Social Security benefits before reaching full retirement age, she added. That’s due to concerns about the future of Social Security, which is fueling concerns that “the money may not be there if they wait,” Boyden said.
Social Security is indeed facing a financial crunch, with an aging U.S. population resulting in its payments now outpacing contributions from workers. Without changes to the program, that will result in its trust funds becoming insolvent by 2034, according to the most recent calculation from the Social Security Board of Trustees.
Yet many people wrongly believe that means Social Security will halt payments if the trust funds become insolvent. Payments would continue in such an event, but benefits would be reduced by about 20% — a potentially major financial hit to the program’s more than 70 million beneficiaries.
Still, there are ways lawmakers can shore up the program, such as by raising the income cap on Social Security taxes, which stands at $176,100, according to experts. Earnings over that amount are exempt from the payroll tax, which funds Social Security.
In the meantime, non-retired Americans told Schroders they believe they need $5,032 in monthly income to retire comfortably. But today’s retirees on average generate about $3,250 in monthly retirement income, Boyden said, adding that the gap signals the need to help workers plan better for retirement.
A recent analysis from Goldman Sachs found three-quarters of younger working Americans say they’re struggling to save for retirement because basic expenses such as housing are eating up a bigger share of their income compared with prior generations.
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