Retiring too early could cost you $182,000 in benefits, study says

Recipients of Social Security lose out on tens of thousands of dollars in lifetime spending by claiming their retirement benefits too early, according to new research. 

A study, conducted by researchers at Boston University and the Federal Reserve Bank of Atlanta, suggests that virtually all American workers between the ages of 45 to 62 should wait beyond age 65 to collect their retirement benefits.

Furthermore, over 90% of Americans should wait until age 70 — but only 10.2% appear to do so, the researchers said. 

Workers ages 45 to 62 who wait until age 70 to retire would increase their lifetime discretionary spending by a median of $182,370 or 10.2%, the study found. 


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The analysis was conducted by David Altig of the Federal Reserve Bank of Atlanta, Laurence Kotlikoff of Boston University, and Victor Yifan Ye, who received a Ph.D. in economics from Boston University and now works as a research scientist at Opendoor Technologies, a digital platform for residential real estate. 

The working paper, published by the National Bureau of Economic Research, used data from the Federal Reserve’s 2019 Survey of Consumer Finances and a Social Security analyzer tool developed by Kotlikoff’s firm, Economic Security Planning, Inc.

The earliest a person can start receiving retirement benefits is age 62, though they receive a 25% reduction in their monthly benefits, according to the Social Security Administration.

The full retirement age in the U.S., also called the "normal retirement age," was 65 for many years. But in 1983, Congress passed a law to gradually raise the age as people began living longer and have become generally healthier in older age.

The law raised the full retirement age beginning with people born in 1938 or later. Now, the retirement age gradually increases by a few months for every birth year, until it reaches 67 for people born in 1960 and later.

If a person opts to delay their retirement benefits beyond their full retirement age, the funds will only continue to increase up until age 70 — reaching 132% of the monthly benefit at that point.

"Social Security is a critically important component of retirement-income security. Unfortunately, hundreds of millions of workers are making arguably highly inappropriate collection decisions — decisions that significantly reduce their lifetime Social Security benefits and, consequently, their lifetime spending," the study authors conclude. 

The study authors noted how Americans are "notoriously bad savers" and most retire with "inadequate economic resources. Some 40% of retirees are more than 50% financially dependent on Social Security — and roughly 13% are entirely dependent on those benefits, the researchers said.

There are several factors that go into the decision to claim retirement benefits earlier, including the need to pay for life essentials, a concern that Social Security will run out of money, or even the worry that some may not live long enough to justify waiting, according to the financial news site Barrons.

Social Security benefits increase and worry over depletion

Social Security pays benefits to more than 65 million Americans, mainly retirees as well as disabled people and survivors of deceased workers. It’s financed by payroll taxes collected from workers and their employers, federal income taxes paid by some beneficiaries on a portion of their benefits, as well as interest earned from the Social Security trust fund investments.

In 2023, millions of recipients will see an 8.7% boost on their monthly checks thanks to a cost-of-living adjustment (COLA) fueled by record-high inflation. But the higher payout could put additional pressure on a system that’s facing a severe shortfall in coming years.

The annual Social Security and Medicare trustees report released in June warned that the program’s trust fund will be unable to pay full benefits beginning in 2035.

If Social Security’s trust fund is depleted, the government will be able to pay only 80% of scheduled benefits, the report said. Medicare, a separate Social Security Administration program that covers health care costs, will be able to pay 90% of the total scheduled benefits if the fund is depleted.

In January, a Pew Research Center poll showed 57% of U.S. adults saying that "taking steps to make the Social Security system financially sound" was a top priority for the president and Congress to address this year. 

Securing Social Security got bipartisan support, with 56% of Democrats and 58% of Republicans calling it a top priority.

This story was reported from Cincinnati. The Associated Press contributed.