Americans are eligible to claim Social Security retirement benefits without any reduction when they reach what the Social Security Administration calls the 'full retirement age.' For people born after 1942, their full retirement age ranges from 66 to 67, depending on the year the person was born. But consumers can begin to claim their benefits at other points as well, starting either several years before or several years after their full retirement age. The outcome is not the same, however, depending on when you opt to claim your benefits. The earlier you claim your benefits, the less money you will receive each month. If instead you wait to claim your benefits later, you actually get more money per month. Because this is a one-time choice, the amount of each payment you will receive generally does not change later on (aside from cost-of-living increases). So if a consumer claims the reduced benefit now, then generally they will receive that reduced amount for the rest of their lives.
Today, we are releasing a report which shows that many consumers are not taking advantage of the choices they have to get a higher lifetime income to secure their retirements. This is true in spite of the great importance of the choices that consumers can make about the timing of claiming their Social Security benefits. The report highlights the fact that many Americans are collecting early despite living longer lives. Indeed, studies show that nearly half of all retirees start collecting their benefits at their earliest eligibility age, which is 62 years old. In 2013, nearly three quarters of Americans claimed benefits before their full retirement age, and 46 percent claimed them at the first possible moment, when they turned 62. Yet many Americans must now stretch those benefits payments over a longer period, since those reaching the age of 65 today will live, on average, to age 85 and perhaps even longer if the current trends continue. This means consumers who are retiring today will likely need sufficient income and savings to cover 20 years or more that they will be spending in retirement.
The report also highlights the well-known problem that many of the people who are at and near retirement age are unprepared financially. For example, four in 10 of the 'late boomers,' who are people like myself who currently fall into the 51 to 59 age range, are reaching retirement with limited or no savings and are projected to face a savings shortfall. And with declining coverage from traditional pension plans that pay a regular monthly payment, Social Security is the only guaranteed monthly income for a majority of older consumers, which means retirees are coming to rely on it more and more.
In fact, approximately two-thirds of the nearly 40 million Americans age 65 and older who receive Social Security benefits depend on those benefits for half or more of their retirement income. Social Security is particularly important for the growing number of beneficiaries who are age 80 and older, since it accounts for about 70 percent or more of their income.
Studies have shown that the people who claim their Social Security benefits before their full retirement age typically have more limited knowledge of their benefits and available claiming options than those who claim at their full retirement age or after. Indeed, several recent surveys show that many non-retirees are either confused or lack basic knowledge about Social Security. For example, one study found that only 22 percent of pre-retirees knew their full retirement age. Only 12 percent knew how their benefits would change if they claimed before, at, or after that age. And only about 5 percent of those surveyed knew how their benefits are calculated. This tells us that misunderstanding and confusion about the facts are hindering many Americans as they try to make informed decisions about this key element of their retirement futures.
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We are now undertaking novel efforts to help older Americans cope with these problems. The Consumer Bureau has worked closely with the Social Security Administration to offer the new Planning for Retirement tool that we are unveiling today.
As we developed this tool, we found ourselves thinking about consumers in their fifties, who are starting to become more aware of their Social Security benefits. They are beginning to consider the timing of their possible decisions around retirement, such as when to stop working, when to downsize their home, and when to tap into any 401(k) or IRA benefits they may have built up over the years. Because many of these decisions are harder and more expensive to reverse once they have been made, we found that it would be important to engage people who were in their early fifties, when they still have the flexibility to plan ahead in targeting their claiming age.
The bottom line is that retirement is an increasingly complex process with multiple decision points. As a result, our new tool is interactive and allows people to make their own estimates based on their own circumstances. The decision they must make about when to claim Social Security requires estimates of longevity, inflation, current savings, and interest rates, and it requires calculations about planning and budgeting. With our new tool, consumers can also plug in their date of birth and their highest annual work income to see their estimated Social Security benefits.
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