Many will want to claim their Social Security benefits early this year simply because they want to claim the high cost-of-living (COLA) adjustment. The reality: they don’t have to claim early to get the benefit of this, or any other year’s, benefit. Social Security applies all annual COLAs by simply accumulation between the ages of 63 and 70 for those waiting to claim, so the adjustment is already built-in to the formula.
There may be legitimate financial reasons for some people to claim early – but, when you build your financial house, it’s good to have a blueprint first. Houses built without blueprints generally don’t turn out too well. It’s all about optimizing your claiming strategy; unfortunately, few Americans are making optimized decisions. (There’s a lot to know about claiming strategies; learn more here.)
The National Bureau of Economic Research (NBER) study in 2022 found that virtually all American workers ages 45-62 should wait beyond 65 to begin collecting Social Security and more than 9 out of 10 should wait until age 70, yet just 10.2% of Americans seem to do so. The median loss for this age group in the present value of household lifetime discretionary spending is in excess of $180,000.
Those with health issues or little faith in Social Security solvency – a major driver of claiming mistakes – may be convinced they should claim early, even where there might be a younger and healthier spouse who would benefit by delaying. Others may have an emotional fear of spending down their retirement savings before Social Security kicks in. Few of these people, however, have seen the math or considered the consequences of their decision.
The present value calculations indicate that getting the claiming decision right can add the equivalent of a six-figure windfall to the retiree’s balance sheet.
One size does not fit all. That’s why plans have to be individual, not boiler plate. It pays – literally – to get your ducks lined up before making decisions. Learn more about Social Security claiming here.