It's like the retiree version of the Stanford marshmallow experiment: one marshmallow now or two later. How long can you delay gratification? But with Social Security, the difference could mean hundreds of thousands of dollars over your lifetime.
Still, few Americans wait until their full retirement age—65 to 67, depending on their birth year—when they can claim full benefits.
Nearly six in 10 retirees claim Social Security benefits before they reach it, according to a recent survey by Franklin Templeton Investments. Only about 16 percent claim their benefits when they hit full retirement age. (Seven percent of people surveyed delayed their benefits past full retirement age, 4 percent were eligible for benefits but haven't taken them yet, and 14 percent weren't eligible.)
Vicki Felmlee of Grand Junction, Colo., claimed her Social Security retirement benefits in October, a month after her 62nd birthday. She and her husband, Tom, are debt-free, have a modest nest egg invested in bank CDs, drive a 2002 Pontiac Grand Prix and live in a home she has owned since 1977.
"We do not have a caviar lifestyle," said Felmlee, who is winding down her web design and marketing business.
By claiming her benefits early, Felmlee receives nearly 20 percent less than the full retirement benefits she would have been eligible for. She said she considered waiting until her full retirement age of 66 to claim the benefits, but worried she would miss out on her golden years. "Doggone it, it shouldn't all be about money. There is a quality of life thing," she said.
You may choose to retire as early as age 62, but doing so may result in a reduction of as much as 30 percent of your benefits, according to the Social Security Administration (SSA). For early retirees, the SSA reduces a retirement benefit by 5/9 of 1 percent for each month before normal (or full) retirement age, up to 36 months. If the number of months exceeds 36, then the benefit is further reduced by 5/12 of 1 percent per month.
The Social Security Administration also imposes limits on income for early retirees. If early retirees earn more than $15,720 in 2015, their benefits will be reduced by $1 for every $2 they earn above the limit.
Each year you wait past full retirement age to claim Social Security benefits up to age 70, you earn an 8 percent delayed retirement credit that will increase your Social Security benefits in addition to cost of living adjustments.
What's your full retirement age? If you're born between 1943 and 1954, your full retirement age is 66. Then the full retirement age increases in two-month increments each year for those born between 1955 and 1959. For example, if you were born in 1956, your retirement age is 66 and 4 months. For those born in 1960 and later, the full retirement age is currently 67. (The SSA offers a calculator to help with the math.)
Anxiety about Social Security is palpable as roughly 10,000 baby boomers have been entering their retirement years each day since 2011, and that trend will continue through 2030. (Tweet This)
"Get What's Yours," a guide about how to maximize claiming Social Security retirement benefits, is the 19th best-selling book on Amazon after hitting the top spot in February when the book debuted. When and how you claim Social Security benefits "can beat any annuities you can buy in the marketplace," said Laurence Kotlikoff, the book's co-author and a Boston University economist.
Social Security can be complicated, especially for married couples, divorcees and widows. Financial Engines, the nation's largest provider of managed accounts for defined contribution retirement plans like 401(k)s, estimated there are 8,000 different ways a married couple might claim their Social Security benefits. Many of these strategies rely on claiming spousal or survivor benefits.
To deal with the complexity, many organizations, including the AARP, Financial Engines and the Social Security Administration, offer free online calculators and other tools. Kotikoff also licenses an online Social Security advice tool called Maximize My Social Security to households for $40 per year.
Financial advisors are getting in on the act, too. More than 3,000 advisors attended a Social Security benefits webinar Tuesday hosted by the Insured Retirement Institute, which represents the annuity industry, as part of National Retirement Planning Week (a week of events sponsored by the IRI and other education, consumer advocacy and financial services organizations).
"It's a fairly new trend for advisors to think about Social Security as an asset class," said Michael Doshier, vice president of retirement marketing at Franklin Templeton Investments. "But Social Security could potentially be the largest asset their clients have, depending on when they claim their benefits and how long they live."
Some claim Social Security benefits before they hit full retirement age because they feel like they need the money sooner. But others worry they need to claim their benefits before they disappear, said Doshier, even though that's unlikely to happen.
All of Social Security's trust funds are projected to be depleted by 2033. But even after that year, the agency projects it will have enough money from payroll taxes to cover three-quarters of the benefits it has promised retirees, according to the 2014 trustee's report. And this scenario assumes that Congress will not act to improve the financial status of Social Security by raising payroll taxes, cutting benefits or a combination of both tactics.
"It's not nearly as dire as most people think, and an advisor can walk them through the decision process logically," Doshier said.