These can cost you real money
by
Liz
Weston/NerdWallet | June 17, 2019
Researchers tell us
that most people would be better off waiting to claim Social Security benefits.
Yet most people file early.
More than half apply
for Social Security before they reach full retirement age, which is currently
66 and rising to 67 for people born in 1960 and later. More than 30% apply as
soon as they can — at age 62. Only about one in 25 applicants waits until age
70, when monthly benefits max out.
Some people have
little choice, of course. They may have no savings and no job. Others have better
options than applying early, but don’t realize it.
That’s due in part to
the many, many myths surrounding Social Security —
and people’s tendency to think they know more about this program than they
actually do.
A 2013 survey by
Financial Engines found that 77% of pre-retirees felt confident about their
Social Security knowledge, but 95% could not correctly answer eight questions
about how the program works.
Here are the myths
most likely to cost you money:
1. ‘It doesn’t matter
when I take Social Security’
Social Security
benefits increase by about 7% each year between 62 and your full retirement
age, and by 8% each year between full retirement age and 70. This
actuarial adjustment aims to ensure that people who opt for larger checks for a
shorter period don’t get less than those who get smaller checks for longer
periods.
But longer life
expectancies, current low interest rates and rules regarding survivor benefits
mean that most people are better off delaying, says researcher Sita Slavov, a
professor of public policy at George Mason University in Arlington, Virginia,
and a faculty research fellow at the National Bureau of Economic Research.
Social Security also
provides insurance against longevity. People who live longer than expected can
run out of savings and wind up depending mostly or even entirely on Social
Security. That alone is a good reason for most people to delay their
applications.
2. ‘If I have a
shorter-than-average life expectancy, I should claim benefits early’
Most people
underestimate how long they are likely to live, according to the Stanford
Center on Longevity. A 65-year-old man today can expect to live to 84,
according to the Social Security Administration. A 65-year-old woman can expect
to live to 86.5. Couples who are 65 today stand a 50% chance of having one
spouse live to 92, according to the Society of Actuaries. Life expectancies are
even longer for those now in their mid-50s. One in two women and one in three
men will live past 90, the actuaries say.
Couples
who are 65 today stand a 50% chance of having one spouse live to 92, according
to the Society of Actuaries.
Even if you’re right
about having a shorter life expectancy, though, claiming early could
shortchange your mate. Married couples will lose one of their checks when the
first spouse dies, which can cause a serious drop in income. The survivor will
get the larger of the two checks the couple was receiving. That gives the higher
earner in a couple — the one whose check will be the largest — a strong
incentive to delay so that the survivor’s benefit is larger.
3. ‘If I claim
benefits early and invest them, I’ll come out ahead’
No investment offers
a guaranteed return as high as what you can get from delaying your Social
Security application. To match that return, you’d have to take a lot of risk.
Even the most prudent investor can get shellacked by a bear market or real
estate downturn.
4. ‘I have to claim
Social Security as soon as I quit working’
You don’t have to
start Social Security when you stop working, or vice versa. Financial planners
often suggest people tap their retirement funds or other savings if that allows
them to delay their applications.
Also, you don’t have to
wait until 70 to get substantial returns. Delaying four years, from 62 to 66,
can translate into a 33% sustainable, annual increase in your standard of
living, Slavov says.
5. ‘I need to apply
before Social Security goes bankrupt’
Social Security is
not “going bankrupt.” If Congress doesn’t act, in 2035 the system will be able
to pay only about 80% of promised benefits — and 80% clearly is not the same as
zero. If and when Congress does get around to fixing Social Security, the
changes are likely to affect people further from retirement. “Locking in” your
benefit early just means settling for smaller checks for life.
This article was
written by NerdWallet and was originally published by The Associated Press.
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