Amaka Chukwuma
Wealth of Geeks
While nearly three-quarters of investors who are not yet retired see the benefits of waiting til age 70 to access their money, only 10% say they plan to actually do so. Even more startling, those 60-65, with only a few years to wait, overwhelmingly (95%) see the benefit, but even fewer are able or willing to wait the final few years.
Those are just a few of the recent findings in Schroders annual US Retirement Survey. The asset management company’s study of 2,000 investors ages 27 to 79, conducted between February and March, uncovers the tug-of-war between short-term necessities and the allure of bigger monthly payments in retirement.
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Factors shaping retirement choices
Exploring the factors that sway individuals towards an early commencement of their social security payments, Dr. Praveen Kumar, Chairperson of the Department of Finance at C.T. Bauer College of Business at the University of Houston, offers his insight. Dr. Kumar highlights how individuals weigh the immediate advantages of early payouts against the potentially higher future gains of deferring claims until 70.
This deliberation, he asserts, mirrors the considerations underlying any saving or investment choice—a balance between immediate gratifications and anticipated future rewards.
Dr. Kumar expounds, “Just as in any financial decision, we must balance the benefits of instant consumption and the prospective advantages down the line. It is not irrational to opt for higher consumption if the perceived immediate benefits outweigh the uncertain benefits of higher consumption in the future. The immediate benefits of starting social security claims before age 70 include addressing solvency concerns or ‘financial need’ and the utility of enjoying liquidity now, which may include affording travel or other favorite activities.”
He emphasizes that this approach isn’t universally applicable, as he notes, “A healthy individual with no pressing financial concerns should seriously consider the considerable merits of delayed payouts.”
He aptly cautions that one shouldn’t overlook the tax implications of early benefits, particularly if full retirement hasn’t been attained. With a significant portion of Social Security benefits considered taxable personal income for most recipients, early claimants might inadvertently push themselves into higher tax brackets.
Kumar’s insights don’t just provide financial analysis; they also delve into the psychological backdrop of individuals’ choices. He points out that the lingering effects of the pandemic, which curtailed meaningful activities such as travel and social interactions, might have fueled the inclination towards immediate consumption over delayed gratification. This, he postulates, could be due to heightened uncertainty about future consumption benefits stemming from delayed payouts.
Dr. Kumar points out, “I suspect that the suppressed consumption of the last three years can at least partially explain the seemingly surprising low figure of people thinking of delaying. After this experience, the uncertainty of future consumption benefits (from delaying payoffs) will plausibly be higher, which may be contributing to the high proportion of respondents deciding against delay.”
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A case for early claims
Shaun M. Jones, CFS, CFP, president of Jones Fiduciary Wealth, adds a deeper layer of understanding to the elements influencing retirement choices. Drawing from his engagements with retirees, some factors the study missed include the significance of breakeven points, mortality risk considerations, and the inability to bequeath social security benefits to heirs, which retirees consider when opting for early claims.
He accentuates, “It must be said that the benefit to waiting is positive only if you assume you will earn less than, say 6% on your investments. Yes, social security increases by 8% per year, but it is not 8% compound interest – it’s simple interest… and you have to wait until you are 70 to receive any of the benefit of that 8% interest.”
Jones reveals that the prevalent breakeven point for delaying is approximately 12 years, during which an individual would need to live to match the total benefits accrued through early claims at 62. And this calculus doesn’t even factor in the potential impact of inflation, further bolstering the appeal of immediate income.
The fund specialist also underscores the advantages of early payments regarding liquidity and compound returns. He argues that accessing government funds early while personal investments accrue compound interest positions retirees securely and ensures the potential transfer of wealth to heirs, a facet absent in unutilized social security benefits.
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Informed choices are critical
Kumar stresses the importance of informed decision making. While many might grasp the concept of higher benefits with delayed claims, the precise magnitude of these benefits and their implications might not be fully understood. With proper information, Kumar urges individuals to conduct meticulous analyses of the costs and benefits of initiating benefits early. He advises that even pressing financial needs can often be met through alternative financing modes.
The ramifications of not waiting until 70, Dr. Kumar stresses, are enduring. Lower benefits for the remainder of an individual’s potentially lengthy lifetime could significantly impact financial security. Tax considerations must also be considered, especially for those not contemplating full retirement.
He suggests a comprehensive approach that extends to well-informed evaluations of personal values and costs. Accessible online resources, such as those offered by the Social Security Administration and IRS, offer a solid foundation for crucial decisions. Professional guidance is valuable, but it’s most effective when addressing specific inquiries—an endeavor that necessitates individual introspection.
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Navigating retirement crossroads
The survey by Schroders shows that there are many complicated reasons why Americans decide about their retirement. The crossroads between immediate financial needs and delayed gratification for enhanced benefits are complex and deeply individual, requiring a thorough examination of personal values, financial realities, and informed analysis.
