The financial advantages of deferring Social Security payments have long been noted. Benefits can be taken as early as age 62. But for each year they are delayed up until the age of 70, benefits rise substantially. Despite these higher lifetime payments, large numbers of Americans begin taking Social Security when they turn 62.
Experts have been puzzled about why so many people rush to take early benefits. Now, researchers have concluded that it may just be because no one told people there was a better alternative.
A straightforward brochure mailed to a test group of people, most between ages 60 and 65, stressed the benefits of delaying retirement. Researchers then followed up a year later and compared people who had received the brochure with a control group that had not. They found that many people in the test group—especially women—had decided to keep working.
"Decisions about when to retire and when to claim benefits can have large implications for well-being over many subsequent years," said the study, by Jeffrey B. Liebman (Harvard University) and Erzo F.P. Luttmer (Dartmouth College). "Such decisions also have elements of irreversibility that make it hard to undo poor decisions."
Further, they said, "retirement-related decisions are very challenging to get right." Social Security tax and benefit provisions are complicated and may involve a series of calculations that are not clear or easy to understand.
Their brochure emphasized three benefits of delaying retirement. Here are edited excerpts that explain these benefits.
1. You may live longer than you think. According to the National Center for Health Statistics, out of all 65-year-olds in America today, about 1 in 4 will live to age 90. For the average 65-year-old couple living in America today, there is a 47 percent chance that at least one spouse will live to age 90. With many people living into their 90s, savings often need to last a long time after retirement.
2. Postponing your retirement typically means more money for a more comfortable retirement. Working longer will help you put away more money for retirement. If you work a few more years, you'll not only add to your existing savings, but you'll avoid spending the money you've already saved in the meantime.
Social Security benefits generally go up the longer you wait to claim them, up until age 70. For each year you postpone claiming, your retired worker benefits increase by about 9.5 percent of the amount you'd get at age 62. For instance, a worker who would get $1,000 in monthly retired worker benefits if he claimed at age 62 could expect about $1,330 in benefits claiming at age 66. But if the worker postponed claiming until age 70, he could expect about $1,760 in monthly benefits. In addition to the increase from delayed claiming, working a few more years generally raises your Social Security benefits because most people's benefits depend on their work history.
3. It pays to work, even while you're receiving Social Security benefits. Some people who claim benefits at age 62 stop working between ages 62 and 66 because they fear they will lose their benefits. In truth, if your benefits are reduced from working, the money is not actually lost. Instead, the reduction is returned to you later in the form of increased benefits. This complicated provision is called the Earnings Test.
Working longer will help you put away more money for retirement. If you work a few more years, you'll not only add to your existing savings, but you will also avoid spending the money you've already saved in the meantime.
If you do claim before your full retirement age, your monthly benefits will be reduced if you earn more than a certain threshold amount per year; The threshold is now $14,160. Once you reach your full retirement age, your benefits are never reduced, no matter how much you earn.
If your benefits were ever lowered from working, they are recalculated to a higher amount when you reach full retirement age—meaning the total benefits you can expect to receive over your lifetime are not really cut, even if they might be temporarily reduced.