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Retirees pay for claiming Social Security too early

People say they want to wait longer to claim Social Security, but life often gets in the way.

A Nationwide Retirement Institute survey of Americans 50 years and older found that 83 percent of recent retirees started taking their benefits before their full retirement age, receiving 49 percent less in benefits than if they would have waited. Among recent retirees, 38 percent said they claimed Social Security benefits because they needed the money, 30 percent because they had health problems and 24 percent claimed after a job loss, Nationwide found.

Confidence in the financial future of Social Security is a top reason people say they claim their Social Security retirement benefits early. Roughly 1 in 4 retirees say they plan to claim benefits early at age 62, instead of their full retirement age (which is 66 or 67 years old for most retirees depending on when they were born) because they worry the funding for Social Security will run out during their lifetime.

The Social Security Administration forecasts that its trust fund for retirement benefits will be exhausted by 2034. However, even if Congress does nothing to shore up one of the nation's most popular federal programs, the Social Security Administration projects it will have enough money from payroll taxes to cover three-quarters of retirement benefits promised to retirees through 2090.

Longevity is also a big concern for people who claim Social Security benefits early. Twenty-two percent of people near retirement who want to claim early said they plan to do so because they don't expect to live long enough to make waiting to optimize their benefits worthwhile.

Yet people tend to think Social Security will provide more for them in retirement than it actually does. Future retirees surveyed by Nationwide expected Social Security to cover 52 percent of their retirement expenses while, according to the Social Security Administration, such benefits make up about 38 percent of the income people have in retirement. And 26 percent of retirees surveyed by Nationwide have no other source of retirement income except Social Security benefits.

"Retirees may be missing out on hundreds of thousands of dollars in benefits and they should have a talk with a financial advisor about Social Security before they file for benefits," said David Giertz, president of distribution and sales for Nationwide.

Retirees who consulted with a financial advisor had an average expected monthly Social Security payment of $1,911 compared with an average monthly payment of $1,534 for retirees who didn't work with an advisor, Nationwide found.

But even among retired respondents who said they worked with an advisor, the average age they started collecting Social Security retirement benefits was 63. That's only a year later than the earliest they could begin claiming benefits.

To be sure, if you have a family history of health problems or have no retirement savings, claiming Social Security benefits early may make sense. "The focus for us is always the client's cash flow needs," said Leon LaBrecque, a certified financial planner in Detroit. "If we can show a client a way to use existing savings as a bridge to full retirement age, we show them the amount they will gain by waiting."

Most financial advisors recommend waiting as long as possible to claim Social Security benefits. Why? Because you earn delayed retirement credits that increase the future retirement benefit by 8 percent per year until age 70.

"I see without a doubt that the biggest financial risk is longevity, and I feel it's my job to set clients straight on this," said Charles Sachs, a certified financial planner with Private Wealth Counsel in Miami.

Given the volatility of stock market and longer life expectancies, "having an inflation-indexed annuity, backed by the federal government in the form of a Social Security benefit is a nice thing to fall back on," he added.