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Claim Social Security at the Right Time

Eileen Ambrose, Senior Editor, Kiplinger's Personal Finance

One of the biggest financial decisions you make on the road to retirement is when to claim Social Security benefits. You can take benefits as early as age 62, but that means your checks will be up to 30% less than if you wait until full retirement age (which is 66½ for today's 62-year-olds). Or, for every year you delay Social Security beyond your full retirement age, your benefit grows by 8% until age 70.

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That's a lot of leeway--and a lot of room to make a decision that can trim benefits over a lifetime. In fact, according to a new study, today's re­tirees have rarely made the right call, with only 4% taking Social Security at the financially optimal time.

Put another way: Collectively, retirees stand to lose out on $3.4 trillion in income throughout their retirement--or about $111,000 per household. Almost all of that income is being forfeited because retirees are claiming benefits too early, concluded a study by United Income, an online investment management company. (Results were based on data from roughly 2,000 retiree households, including the age they claimed benefits, their assets, gender, health and more.)

What's best for you? There is no single optimal time to claim benefits for everyone. If you are in poor health and unlikely to have, say, two or three decades in retirement, claiming early may be best. Or perhaps you were forced into early retirement by a layoff and had no other choice but to claim early. But "for the vast majority of people, delaying until 70 is best," says Jason Fichtner, an author of the study and former chief economist at the Social Security Administration.

Given the dollars at stake, why do most retirees claim Social Security by age 63? "They hear the words 'early eligibility age of 62,' and they think that's the first day they're eligible without understanding that it's a reduced monthly benefit for life," says Fichtner.

He wants to change that mind-set. One way to do that, he says, is to revise how the SSA describes claiming. Instead of labeling 62 the "early eligibility age," the agency should name it the "minimum benefit age," while calling 70 the "maximum benefit age," he says. "What I want people to start thinking about is how they can minimize the risk of running out of money in retirement, especially given that longevity is increasing for so many people."

Kiplinger generally recommends that retirees wait until age 70 to claim benefits, if health and finances permit. But we often get pushback from readers, who argue that benefits should be taken early in case Congress cuts them in the future to shore up the program. Proposals to change Social Security generally exclude current retirees and workers 10 to 15 years away from retirement. And even if Congress does nothing to fix the program's solvency, retirees will receive about 80% of promised benefits--another reason to wait for a bigger payout, says Fichtner.

Others say they would be better off taking the money early and investing it. But Fichtner says investors would have to take on more risk to beat the benefit boost that retirees get by delaying Social Security. "The odds are you would have to be fully in equities and hope the market is good," he says.

James Bayard, a certified financial planner in Baton Rouge, La., hears these arguments from clients, too. They are often persuaded to delay benefits once Bayard runs the numbers.

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He tells them how their benefit can grow each year they delay, and that future cost-of-living adjustments will be based on that bigger benefit. Once some spouses learn they will have only one Social Security check--the larger of the two--when one of them dies, they delay claiming. And when confronted with longevity statistics showing they may live longer than anticipated, Bayard says, "the vast majority of clients will say, 'Okay, let's play it safe.' "

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