Attention Baby Boomers who will soon be turning age 62 and are planning on taking Social Security benefits early, be sure to do your homework before you sign the paperwork.
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A Nationwide Retirement Institute survey of 909 U.S. adults aged 50 or older found that many of those who claimed their Social Security benefits early wish they could change their decision – and the top reason is to maximize their benefit. Meanwhile, of those who wouldn’t change their decision, many say they had no choice – saying they needed the money.
“Social Security is undoubtedly one of the most complex retirement topics facing American workers,” says Dave Giertz, President of Sales and Distribution at Nationwide. “Even those who can identify the factors that will impact their benefit are likely unable to grasp the thousands of rules that apply to Social Security. The complexity makes it extremely difficult for retirees to maximize their benefit on their own.”
Giertz discussed with FOXBusiness.com what you need to know.
Boomer: What impact has claiming Social Security early had on American workers?
Giertz: American workers are potentially missing out on hundreds of thousands of dollars in retirement income by claiming Social Security early. Instead of leaving money on the table, retirees need to consider all of their filing options to help understand how Social Security can fit into their overall retirement income plan.
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Maximizing your Social Security benefit is more important than ever because, for most, it is the only source of retirement income. Only 36 percent of future retirees we surveyed have pensions, compared to 54 percent of recent retirees and 60 percent of the oldest retirees. Preparing for retirement holistically by working with online tools and advisors can help retirees face challenges posed by lack of retirement income, health care costs and other obstacles.
Boomer: What surprises typically come up in retirement?
Giertz: Seven out of 10 retirees who have health problems say the problems came sooner than they expected, increasing the impact on their retirement and their wallets. Additionally, almost two in five retirees (37 percent) say health problems keep them from living the retirement they expected.
For many current retirees, health care expenses are eating up a majority of their Social Security benefit. The average American claiming their Social Security at 62 will spend about 61 percent of their Social Security benefits on health care costs, according to a case study comparing data from Nationwide Retirement Institute’s Social Security 360 Analyzer and Health Care Costs Assessment tools. That’s before factoring in long-term care costs.
Meanwhile, according to the same case study, if an average American waits until age 70 to claim Social Security, they have more money left over and end up spending just 47 percent of their benefit on health care costs.
Boomer: How can Baby Boomers project what their benefit will be, so as not to be surprised when they retire?
Giertz: As a start, don’t guess. About a quarter of Americans who haven’t claimed Social Security say they are either guessing or don’t know the amount they will receive in their monthly benefit check. As a result, many Baby Boomers are overstating the amount they might receive. Those approaching retirement say they expect to get $1,610 in monthly Social Security benefits, while in reality recent retirees report their actual monthly benefit is about $1,378, and those who have been retired longer report receiving just an average of $1,185 per month.
Only 11 percent of current retirees used an online calculator to estimate their benefit; however, among Baby Boomers approaching retirement, the use of these tools is becoming much more prevalent. More than four in 10 future retirees (42 percent) have used a Social Security calculator to estimate their benefit.
While the development of Social Security calculators is helping close the Social Security knowledge gap, Americans should work with a financial advisor to create a holistic retirement income plan that includes Social Security. Retirees who work with an advisor are much less likely than those who don’t to say health care costs keep them from living the retirement they expected (11 percent vs. 29 percent).
Boomer: With the increase in the cost of living and inflation in retirement what should future retirees be doing now to support the increase?
Giertz: Nearly two in five Americans nearing retirement (38 percent) expect their living expenses will go down in retirement.
However, changes in the cost of living and inflation are the top reasons expenses increase in retirement, according to the retirees we surveyed. Of those retired 10+ years say the cost of living (79 percent) and inflation (62 percent) are the leading factors impacting their living expenses retirement.
In addition to saving more, maximizing your Social Security benefit is key to coping with cost of living increases and inflation.
Boomer: How can Boomers maximize their Social Security benefit?
Giertz: Eighty-six percent of future retirees cannot correctly identify the three basic factors that the Social Security Administration uses to determine their benefit amount, and, as a result, many retirees do not know how to maximize their Social Security. Understanding how your age, benefit start date and marital status work together to determine the amount in your benefit check every month is a great start.
However, the combinations of different ages, benefit start dates and marital statuses make every individual or family’s ideal filing strategy different – and many Baby Boomers may want to consider a variety of strategies with different benefit start dates.
While life events force many Americans to take Social Security early, those who are willing or able to wait get rewarded for their patience. According to the Social Security Administration, American workers receive and extra 8 percent per year for every year they postpone collecting benefits beyond their full retirement age amount – up to age 70.