More information equals better decisions on when to begin collecting
NEW YORK, NY–(Marketwired – June 23, 2016) – Americans who collect Social Security benefits too early may be losing money, and putting their standard of living at risk, according to new research from Columbia Business School.
The research, “Time to Retire: Why Americans Claim Benefits Early and How to Encourage Delay,” analyzes the decision-making process of people claiming retirement benefits, and provides guidance for organizations about how to encourage people to delay taking Social Security. Delaying will often increase the size of the monthly benefit received.
“This decision on when to claim benefits is important because Social Security retirement benefits are the primary source of income for more than 50% of the older population,” says Eric Johnson, co-author of the research and the Norman Eig Professor of Business at Columbia Business School.
Professor Johnson presented the findings in this video.
Not solely an economic decision
The research debunks the theory that the decision to claim Social Security is driven solely by economic factors, instead demonstrating that the decision is influenced by the way the benefits information is presented, and by the decision-making process people adopt when making a choice.
Throughout five studies, the authors surveyed adults 45 to 70 years old from a variety of socio-economic backgrounds. The research revealed that people who were presented with preference checklists regarding their ideal claiming age tended to demonstrate an inclination for later claiming. By using this method, researchers observed that when given all of the information, most Americans would delay their claiming age by an average of 7.6 months.
“Consumers find the reduced benefits that they can collect at 62 more tempting as they approach early retirement age. This results in them claiming early, which for many is a mistake,” said Johnson. “But if they knew why they should wait, then they could see that their monthly benefits would increase by delaying their claim.”
Johnson conducted the research along with co-authors Kirstin Appelt and Jonathan Westfall, both with the Center for Decision Sciences at Columbia Business School, in collaboration with Melissa A.Z. Knoll, a research analyst with the Office of Retirement Policy, Social Security Administration.
Financial support for the research was provided by a grant from the Social Security Administration as a supplement to National Institute on Aging grant 3R01AG02793404S1, and by a grant from the Russell Sage/Alfred P. Sloan Foundation Working Group on Consumer Finance. The views expressed in the research do not represent the views of the Social Security Administration. The research findings explain why consumers should delay Social Security benefits; however, individual factors such as health and life expectancy were not a part of the study.
“We determined there is a real need for customized assistance to be provided to anyone ready to claim Social Security benefits so they can be properly guided through the decision-making process. It’s critical for them to understand any financial drawbacks to claiming early,” said Johnson.
To learn more about the cutting-edge research being conducted at Columbia Business School, please visit www.gsb.columbia.edu.
About Columbia Business School
Columbia Business School is the only world-class, Ivy League business school that delivers a learning experience where academic excellence meets with real-time exposure to the pulse of global business. Led by Dean Glenn Hubbard, the School’s transformative curriculum bridges academic theory with unparalleled exposure to real-world business practice, equipping students with an entrepreneurial mindset that allows them to recognize, capture, and create opportunity in any business environment. The thought leadership of the School’s faculty and staff, combined with the accomplishments of its distinguished alumni and position in the center of global business, means that the School’s efforts have an immediate, measurable impact on the forces shaping business every day. To learn more about Columbia Business School’s position at the very center of business, please visit www.gsb.columbia.edu.
How long does it take to break even by delaying benefits? I see the focus on an 8% increase in benefits each year by waiting, but this needs to be balanced by how many years of the higher benefit are needed to make up for the lost years.
If you use 5% interest and 1% inflation of benefits, then it takes 23 years for starting at age 63 to be better than age 62. It takes 28 years for starting at age 70 to be better than age 62. Even at no interest, it takes 12.5 years to break even. There are tax considerations depending on how much income you make while taking benefits, but there will also likely be pressures to added taxes or reduce increases.
So when is it better to take benefits early? Can you use annuity income to hedge against the longevity risk past the break even?