What this article covers
The usual advice on when to claim Social Security is built around life expectancy and maximizing the total benefits you collect. Opher Ganel argues that this is the wrong goal: Social Security works best as longevity insurance, and delaying your claim, if you can afford to, buys an inflation-adjusted, guaranteed increase of about 8% a year that reduces your risk of running out of money late in life.
Key Takeaways
The best Social Security claiming age depends on your risk of running out of money, not just life expectancy
Common advice says to delay if you expect to live long and claim early if you don’t, in order to maximize lifetime benefits. Opher Ganel argues the better question is what claim timing makes sense given your retirement needs and other resources, since maximizing your payout on average can still increase your long-term financial risk.
Delaying Social Security works like a guaranteed, inflation-adjusted return of about 8% a year
Benefits rise by about 8% for each year you delay, up to age 70, with cost-of-living adjustments on top. Opher notes that investing early benefits you don’t need in the stock market adds market risk and is very unlikely to beat 8% above inflation.
Claiming early because of poor health can backfire if you live longer than expected
Claiming at the earliest age can cut benefits by as much as 30% versus full retirement age and 44% versus age 70. If you beat the odds, that reduction lasts for life, so delaying (if you can afford to) may be the safer choice even if you doubt you will reach the breakeven point.
Social Security is a critical part of making retirement even somewhat affordable for many Americans.
According to Fool.com, Social Security can replace over half of career-average wages for low-income Americans, and about 40% for middle-income Americans. By the time you reach the maximum Social-Security-taxable income, benefits replace just over a quarter of your career-average income.
Obviously, unless your income is extremely low, you can’t count on Social Security as your sole source of income.
However, given how little most Americans have saved for retirement by their 60s, Social Security can make the difference between a barely livable retirement vs. abject poverty in old age.
What Is the Common Advice on When to Claim Social Security?
The common advice on timing your claim for retirement benefits speaks to your life expectancy.
This advice attempts to help you maximize your lifetime benefits. If you’re in good health and come from a long-lived family, you’re advised to hold off claiming benefits. This is because benefits increase by about 8% for each year of delay (up to age 70).
On the other hand, if you come from a family with a relatively short life expectancy and/or if your health is such that you don’t expect to survive beyond your 70s, you’re advised to claim as soon as you can, since the reduction in benefits will likely be less than the loss of several years’ worth of early benefits.
At What Age Do Most Americans Claim Social Security?
According to USA Today, 62 is by far the most common claiming age (34.3%), with over 57% claiming before the full retirement age. Less than 8% delay beyond full retirement age, despite the 8% increase per year of delay (up to age 70).
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Why Do So Many Americans Claim Social Security Early?
According to a survey conducted by the National Bureau of Economic Research (NBER), “Common rationales for claiming Social Security before full retirement age include stopping work, liquidity, poor health, and concerns about future benefit cuts due to policy changes.”
Let’s break these down.
- “Stopping work” – this could be due to achieving early retirement by achieving their financial freedom. Alternatively, it could be due to layoffs before retirement age, and not finding another job. That last is what happened to my dad when he was 60. Thankfully, he had defined-benefit pensions from previous employers so he could afford to retire early.
- “Liquidity” – these could be people who find themselves underemployed as they reach age 62, and claiming benefits is their best option to cover expenses beyond their income.
- “Poor health” – these could be people who follow the common advice when their health makes it seem unlikely they’ll survive long enough for the higher benefits achievable through delaying their claim to outweigh the extra years of (lower) benefits.
- “Concerns about future benefit cuts due to policy changes” – these are people who have heard that the Social Security trust fund will run out sometime in the next couple of decades, and believe benefits will be stopped or reduced dramatically even for those already retired at that point.
Will Social Security Run Out Before You Retire?
Addressing the last reason first, according to the Congressional Research Service, the trustees of the Social Security Administration expect the Federal Old-Age and Survivors Insurance (OASI) Trust Fund to run out in 2034, and the Federal Disability Insurance (DI) Trust Fund to run out in 2065.
If the two funds were to be combined, they’d run out in 2035 (the Congressional Budget Office, CBO, made different assumptions in a 2019 report, and projected the funds would run dry as early as 2032).
These projections predate the Covid pandemic and its impacts, so updated projections may well see the funds depleted in under 10 years.
However, this does not mean Social Security benefits will stop once the funds run out. Any of the following steps (or a combination) will resolve the issue.
- Delay full retirement age again (a 1983 amendment delayed it gradually from age 65 to 67 over 22 years)
- Reduce benefits by 21% when the OASI fund runs out, and gradually continue the reduction to 27% by 2094
- Means-test benefits, reducing or eliminating them for the wealthiest of retirees
- Increase the maximum wages to which Old Age, Survivors, and Disability program taxes apply from its current $142,800, potentially with no limit
- Increase Old Age, Survivors, and Disability program tax rates from their current 12.4% to 15.7% once the OASI fund is depleted, gradually continuing to increase it to 16.9% by 2094
Since none of these is palatable, we can count on our elected officials to continue kicking the can as far down the road as they can.
However, once they’re faced with an imminent inability to comply with the relevant laws that require paying full benefits and prevent doing so at a deficit, they will enact some combination of the above steps, just as they did back in 1983.
A Better Way to Decide When to Claim Social Security
Let’s look from this perspective at the three main reasons people file for early benefits (other than fear that Social Security benefits will be severely cut or completely stopped).
Should You Claim Early If You Stopped Working?
If you were laid off in your early 60s and don’t have a better option, early filing may well be your best bet.
However, if you achieved financial freedom and chose to retire early, delaying your claim reduces your long-term risk of running out of money. You get a combination of a guaranteed 8%/year return, with a built-in cost-of-living adjustment on top.
Claiming early and investing in the stock market that money which you don’t need to cover expenses exposes you to market risk, and is very unlikely to do better than 8% above inflation.
If you end up dying before the breakeven point, you could view the loss as an extra premium paid to ensure you would not run out of money before your death.
Should You Claim Early If You Need the Income Now?
If you’re underemployed in your early 60s and can’t afford to not claim benefits as early as possible, then doing just that may indeed be your best path forward.
Should You Claim Early If You’re in Poor Health?
If you’re in poor health and follow the common advice, you’d take early, reduced benefits. If you indeed die soon after, you’ll have received more money than you would have otherwise.
However, if you beat the odds and live much longer than you expected, your benefits would be reduced by as much as 30% relative to claiming at your full retirement age, and by 44% relative to claiming at age 70. Would such a drastic cut allow you a comfortable retirement?
Perhaps, but then again, perhaps not.
Thus, delaying benefits (if you can afford to), even if you think the odds are that you wouldn’t reach the breakeven point, may be the better choice for you. This is simply because it reduces your long-term risk of running out of money.
The Bottom Line: Treat Social Security as Longevity Insurance
Social Security is best seen as longevity insurance. As with all insurance products, you pay a premium to cover the insured event, and if the event (in this case aging) occurs, the plan pays out. All other things being equal, the longer you live, the more benefits you’ll collect.
Trying to maximize your payout will indeed, on average, give you more money over your lifetime. However, it increases your long-term financial risk.
It isn’t necessarily the case that early claiming is wrong for everyone, nor that delayed claiming is best for everyone.
It’s just that the question you should ask yourself is not, “How do I get the most money out of Social Security over my lifetime?” Instead, it should be, “What claim timing makes the most sense given my retirement needs and my other available resources?”
Frequently Asked Questions
What is the common advice on when to claim Social Security?
The common advice is based on life expectancy and aims to maximize lifetime benefits. People in good health from long-lived families are told to wait, since benefits grow about 8% for each year of delay up to age 70, while those with shorter expected lifespans are told to claim as soon as they can.
At what age do most Americans claim Social Security?
According to the USA Today figures cited in the article, 62 is by far the most common claiming age, chosen by 34.3% of claimants. Over 57% claim before full retirement age, and fewer than 8% delay beyond it.
Will Social Security stop paying benefits when the trust funds run out?
No. The article explains that when the trust funds are depleted, Congress is expected to act as it did in 1983, using some combination of raising the full retirement age, reducing or means-testing benefits, raising the taxable wage cap or raising payroll tax rates. Benefits would not simply stop.
Should you claim Social Security early if you retire early?
If you were laid off in your early 60s and have no better option, early filing may be your best bet. But if you retired early by choice and can cover your expenses, the article argues that delaying your claim reduces your long-term risk of running out of money.
Why is Social Security described as longevity insurance?
Like any insurance, you pay a premium and the plan pays out if the insured event occurs, in this case living a long time. The longer you live, the more benefits you collect, so dying before the breakeven point can be viewed as the premium paid for protection against outliving your money.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.