There is a statistically optimal age to claim Social Security. But you’re not a statistic.
Some questions about Social Security are easy. What is it? Why does it exist? How do you sign up? The answers to those questions are straightforward.
However, there’s one key question about Social Security that’s more challenging: When should you claim Social Security retirement benefits? Researchers have conducted studies over the years to try to answer this question. And statistics say there is an optimal age for most people to claim Social Security.
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Patience pays off
In 2022, the National Bureau of Economic Research (NBER) published a paper by three economists: David Altig, Laurence J. Kotlikoff, and Victor Yifan Ye. Altig works with the Federal Reserve Bank of Atlanta; Kotlikoff and Ye work at Boston University.
These three men used a rigorous mathematical approach to determine how much money Americans leave on the table based on the age they claim Social Security retirement benefits. Their findings can be summarized in three words: Patience pays off.
The economists concluded, “We find that virtually all American workers age 45 to 62 should wait beyond age 65 to collect. More than 90 percent should wait till age 70.” Statistically speaking, therefore, the best age to claim Social Security retirement benefits is the maximum age of 70, not the earliest age of 62 or the full retirement age (FRA) of 67 for anyone born in 1960 or afterward.
This verdict shouldn’t be surprising. Social Security penalizes individuals for collecting benefits before their FRA and rewards those who delay claiming benefits after their FRA. Social Security actuaries project that the average 62-year-old American male and female will live another 19 and 22 years, respectively. Claiming Social Security before 70 could lock in lower benefits for a long time.
Assumptions make a huge difference
With a detailed study conducted by reputable economists determining the optimal claiming age for Social Security is 70, is that the end of the story? Not quite.
Altig, Kotlikoff, and Ye had to make some assumptions in their analysis. For example, they assumed an inflation rate of 3%. The researchers also plugged in a discount rate (the interest rate for calculating the present value of future cash flows) of 0.5% into their model.
This discount rate is especially important. If you receive $1,000 in benefits today, it’s worth more than $1,000 in benefits received 10 years from now. Why? There’s a time value of money. You could invest the money and obtain a return on your investment. The adage that “a bird in the hand is worth two in the bush” can be true.
Another study conducted by the Social Security Administration’s Brian Alleva in 2016 focused on just how important the discount rate is in determining the optimal claiming age for retirement benefits. Alleva found that for individuals born in 1952, the optimal claiming age is always 62 if the discount rate assumed is at least 3.8% for men and 4.6% for women.
The key takeaway is that assumptions make a huge difference in what statistics say. If a conservative, lower discount rate is used, the best age to claim Social Security will be 70. However, if a higher discount rate is used, the best age can be as low as 62.
Your best age to claim Social Security
Most financial advisors would tell you that holding off to claim Social Security retirement benefits at least until your FRA is wise. They would also probably encourage you to delay until age 70 if you can. These financial advisors rely on statistical studies that use conservative discount rates. And that makes sense.
However, you aren’t a statistic. Your expected longevity could be lower than the average American’s because of health problems. You might need to claim retirement benefits sooner rather than later because of an urgent financial need.
People often ask the Social Security Administration what age is the best to claim retirement benefits. Here’s how the agency responded to this question in one of its official publications:
The answer is that there’s not a single “best age” for everyone and, ultimately, it’s your choice. The most important thing is to make an informed decision. Base your decision about when to apply for benefits on your personal and family circumstances.
I think the Social Security Administration’s advice on when to claim retirement benefits is better than anything you’ll find in a statistical analysis.
