Retirees Risk Missing Out on $2.1 Trillion in Social Security Benefits

Current retirees are poised to miss out on an astonishing $2.1 trillion in potential wealth by failing to optimize their Social Security claims. A recent study titled “The Retirement Solution Hiding in Plain Sight: How Much Retirees Would Gain by Improving Social Security Decisions” reveals that many retirees, particularly those with higher incomes, overlook the critical timing of their benefits claims.

Social Security is often perceived as a minor component of retirement planning, especially by high earners. Yet, the age at which individuals choose to claim their benefits significantly influences their monthly payments for life. According to financial experts, this decision can cost retirees as much as $24,000 annually.

Common Mistakes in Social Security Claims

Allen Harris, owner of Berkshire Money Management, highlights several key mistakes retirees often make. One prevalent error is aligning Social Security claims too closely with retirement dates. Consider the case of Casey and Sam, aged 64 and 66, respectively. This couple, with a substantial retirement savings of $3.5 million and an additional $600,000 from selling family property, contemplated claiming Social Security immediately upon retiring.

Claiming benefits early could reduce their monthly payments significantly. By waiting until age 70, their benefits could increase by nearly 27 percent. Their substantial savings could bridge any income gaps during the waiting period, allowing them to enjoy their retirement without sacrificing future benefits.

Another common misstep involves delaying Social Security claims without considering personal health and longevity. While waiting until age 70 may increase monthly checks, it’s essential to weigh this against individual health factors. For some, taking reduced benefits at age 62 may be a more sensible choice if health concerns or family history indicate a shorter lifespan.

Tax implications also pose a challenge. Many high earners underestimate how taxes will affect their Social Security benefits; up to 85 percent of benefits may be taxable, potentially pushing retirees into higher tax brackets. To mitigate this, strategic withdrawals from tax-deferred retirement accounts can help manage taxable income and reduce future tax burdens.

Strategic Planning for Financial Stability

Another frequent oversight is overestimating Social Security’s role in replacing pre-retirement income. For instance, the maximum Social Security benefit at age 70 is projected to be around $5,108 per month in 2025, which only covers about 30 percent of a $200,000 annual income. Retirees should integrate Social Security into a broader income strategy that includes pensions and withdrawals from retirement accounts.

For couples, the timing of claims can also significantly impact spousal and survivor benefits. When one spouse passes away, the surviving partner can claim the higher of the two benefits. Delaying the higher earner’s claim until age 70 can enhance these survivor benefits, ensuring financial stability for the remaining spouse.

In 2023, approximately 63 percent of retirees receiving Social Security benefits collected reduced amounts. This statistic underscores the importance of thoughtful planning. Optimizing Social Security claims can provide substantial lifetime benefits and reinforce the overall stability of a retirement strategy.

As Harris points out, effective planning for Social Security is essential. Retirees should not default to simply delaying claims but rather take a proactive approach to maximize their benefits. For more personalized strategies, individuals can reach out to financial advisors like Harris at [email protected].