Wait Until 70 to Claim Social Security. Don’t Let These Myths Convince You Otherwise.

(William Thomas Cain/Getty Images)

Key Points

• Only 10% of Americans delay Social Security benefits until age 70, despite potential for 77% higher monthly checks for those born in 1960 or later.
• Approximately 23% of women and 22% of men claim Social Security at age 62, with half claiming before their full retirement age.
• Social Security is projected to pay 77% of benefits if its trust fund is exhausted, with experts expecting congressional action to maintain benefits.

“Wait until age 70” has long been the standard advice on when to start taking Social Security benefits. Yet fewer than 10% of Americans do so.

Millions could boost their benefits substantially by waiting. For those born in 1960 or later, your monthly check at age 70 is 77% higher than at age 62.

Currently, 23% of women and 22% of men begin collecting Social Security at the minimum age of 62, and half claim it before hitting their retirement age.

How many more could afford to delay claiming? While there isn’t a clear answer, Siyan Liu, a research economist at the Center for Retirement Research at Boston College, notes that about 13% of Americans claim Social Security after hitting full retirement age while continuing to work, typically full-time. They could likely afford to wait longer before starting benefits, she says.

“We don’t know if they don’t understand [the benefits of claiming at 70], or if they think they can do a better job of managing their money than Social Security,” she says. “What the data tells us is they could realistically delay claiming until age 70, and they’re not doing that for whatever reason.”

Plenty of people have good reasons to start benefits early. Many lower-income Americans with meager savings must start collecting their monthly benefit as soon as they stop working to get by. It often makes sense for seniors in poor health to start collecting benefits as soon as possible. And financial advisors frequently recommend that the lower earner in a married couple start collecting Social Security early, even as the higher earner delays filing for benefits until 70.

Still, millions of Americans pull the trigger early every year for reasons that may not hold water. Here are the three big myths about Social Security. Don’t let them keep you from reaching your maximum benefit.

1. The Social Security System Is Going Broke

In less than a decade, Social Security will exhaust its trust fund. That doesn’t mean it will stop paying benefits. Social Security benefits are funded primarily by current workers. If nothing is done to replenish the fund, Social Security says it would still pay 77% of benefits.

That said, most experts expect Congress to fix Social Security before then and maintain benefits for workers nearing retirement just as it did in the early ’80s. It will likely be done by a combination of higher payroll taxes and benefit cuts for younger workers. For example, Congress could lift the tax cap on Social Security so that all earnings are taxed—just as they are for Medicare. That would make the Social Security system solvent until after 2065. This article from the Peter G. Peterson Foundation explains the pros and cons of lifting tax caps.

Lifting the retirement age for younger workers would extend solvency even further, though permanently fixing Social Security would likely require raising the payroll tax as well.

Even in the event that Congress does nothing and benefits are cut, you likely come out ahead by delaying benefits, says Laurence Kotlikoff, a Boston University economist who also sells personal finance software. He notes that if you start your benefits early, they still will get cut in 2033.

“There is a very big incentive to wait because your benefit gets bumped up 7% to 8% every year,” he says. “Yes, if they cut benefits, starting in 2033, the benefit from delaying will be smaller, but it will still be huge.”

2. People Die and Leave Money on the Table

Studies have shown that Americans tend to underestimate their chances of living a long life. This calculator by the American Academy of Actuaries shows a 65-year-old nonsmoking male retiree in average health has a 33% chance of living to age 90, a 13% chance of living to 95, and a 3% chance of living to 100. If he is married to a 65-year-old nonsmoking female retiree in similar health, her respective numbers are 45%, 21%, and 6%. In general, if you live much past 80, you come out ahead by delaying Social Security.

What if you are in poor health and expect to die early? If you are single, by all means, you should claim as soon as possible. However, if you are the higher earner in a married couple and your spouse is in good health, he or she will effectively receive your benefit after you die, and you still want it to be as large as possible.

“If I were 68 and I went to the doctor and he said, ‘You’ve got two years to live,’ I still wouldn’t start my Social Security benefits early,” says retired Baylor University finance professor William Reichenstein, author of Social Security Strategies. “Because this is what my wife is going to inherit.”

Kotlikoff says people should remember that Social Security is a form of insurance and not skimp on it. “You wouldn’t say the chance of my house burning down to the ground is only 10%, and therefore I won’t buy [homeowner’s insurance] on it,” he says.

3. Investing Social Security Checks in the Stock Market Makes More Money

Yes, the average returns on annuities such as Social Security are lower than those on risk assets such as stocks. And yes, stocks have been on a tear since the financial crisis. But there is no guarantee this will continue.

What if you had retired in 1968? The Dow Jones Industrial Average didn’t surpass its peak that year until 1982. A big monthly Social Security check would have insulated you from that downturn.

Regardless, Social Security benefits should be compared with bond investments, says Michael Finke, a professor of wealth management at the American College of Financial Services. Suppose you want to delay collecting Social Security, but you want more money to invest in the stock market. Finke says you should do this by selling some of the bondholdings in your retirement portfolio.

“Even if your portfolio outside Social Security is a little riskier, your retirement income is safer” because of the bigger monthly check, he says.

Write to Neal Templin at neal.templin@barrons.com