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Americans have the option of filing for Social Security from the ages of 62 to 70, however, the majority file well before the current full retirement age of 66. In fact, the most popular age for claiming Social Security is 62, chosen by about 45% of Americans despite the 25% reduction in retirement benefits that comes with early filing. This begs the question: Why don't more people wait?
Data source: Center for Retirement Research.
It's all the same
At first glance, it may seem like the 25% monthly benefit cut would be enough to discourage people from claiming benefits early. Or that the 32% increase for waiting until 70 might tempt a little more than the 3% of retirees who actually wait that long.
However, keep in mind why the Social Security Administration cuts benefits for early claimers. It's not to punish them; it's because people who start collecting benefits early will receive benefits for a longer amount of time.
The Social Security Administration uses actuarial life expectancy tables to determine how long retirees will live. For the purposes of our example, the average 62-year-old retiree can be expected to live for about 21.4 more years, while the average 66-year-old will live for 18.3 more years. In other words, the 62-year-old is expected to receive Social Security checks for more than three years longer than someone who waits until 66 to claim benefits.
While the actuarial math is a bit technical, the bottom line is that your lifetime benefit amount will theoretically be the same, regardless of your age. Many retirees know this, and therefore believe it's best to claim as soon as possible.
Many people just need the money
One of the more obvious reasons people choose to claim Social Security early is simply because they need the money.
It's no secret that millions of Americans are underprepared for retirement. In fact, according to the Economic Policy Institute (EPI), almost half of American families have no retirement savings account at all, including almost 40% of those between the ages of 56 and 61.
The average balance of retirement savings within that 56-61 age group is $163,577, which may sound like a lot, but considering that with the oft-used "4% rule" of retirement, this translates to just over $6,500 in sustainable income from savings. Even more scary, the median amount of retirement savings in this age group is just $17,000.
Without getting too mathematical, this big of a difference between the average and the median implies that the average is skewed by a small percentage of people who have saved extremely well -- in other words, the majority of people have far less than the average.
When you combine the bleak retirement savings situation with the fact that older workers who are unemployed have a more difficult time finding a new job than those in younger age groups, it's no wonder lots of seniors claim Social Security as soon as possible because they need to, not because they want to.
Claim ASAP -- Social Security is in trouble!
This is perhaps the worst possible reason people can give for claiming Social Security early, but it is a concern of many older Americans. While it's true that Social Security is projected to run a deficit in coming years, the system isn't close to being "broke" or "insolvent" like many people would have you believe, so let's separate fact from fiction.
According to the latest Social Security Trustees' report, the trust funds still have more than $2.8 trillion in reserves. What's more, the program is actually expected to operate at a surplus through 2019. After that time, there is expected to be a deficit, and the trust fund is projected to run out of money in 2034. At that point, only 75% of promised benefits will be covered through incoming payroll taxes.
However, there's a lot more to the story than that. Specifically, there are several ways Congress could fix the problem, and history tells us they'll do just that. In fact, 77% of Americans say that they'd gladly pay higher payroll taxes if it meant preserving Social Security for current and future retirees.
So, while Social Security's financial situation is certainly less than ideal, at this point there's no reason to believe benefits won't be available for as long as everyone reading this is alive. There are some good reasons for claiming Social Security benefits early, but this isn't one of them.
The Foolish bottom line
While the statistics may seem surprising at first glance, claiming Social Security before full retirement age is a smart financial decision for millions of Americans. On the other hand, there are some valid reasons for waiting, such as being in good health or a history of longevity in your family, or the fact that you're still working and don't need the income.
The point is that if you're trying to figure out the best age for you to claim Social Security, it's important to consider the points discussed here as well as the overall picture of your life situation and goals.
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