For about 60% of the retiring population, Social Security provides the majority of their retirement income, a BMO Retirement Institute report said. However, many retirees are taking Social Security benefits too early, are not making informed decisions, and are unaware of options and strategies that could maximize benefits.

The timing of when retirees take Social Security can affect their retirement income. If one spouse has a significantly higher benefit, when they claim will affect the combined lifespan of both. In particular, if the main breadwinner claims too soon, then the spousal benefit will be 50% of a smaller monthly check, and the surviving spouse’s benefit would be 100% of the smaller check for the survivor’s lifetime. While Social Security collections can start as early as age 62, it will be a permanently reduced amount. Waiting until full retirement age (FRA)—which varies based on birth year—or even later, will ensure receiving a higher amount.

An example provided by BMO shows that taking Social Security at 62 can result in a reduced benefit of $1,500 per month, typically a 6% to 7% annual reduction. By waiting until FRA, in this case 66, the benefit will be $2,000. Waiting until 70 and using delayed retirement credits results in the highest lifetime benefits. Ultimately, a person could receive an additional $25,000 in total Social Security benefits for a life expectancy of 85 years by waiting until FRA. 

The BMO survey revealed people were aware that if they filed a claim early, they would get a reduced monthly income amount. Furthermore, 91% agreed that waiting to take benefits increases the monthly amount they will receive. However, 48% are currently collecting or planning to collect before full retirement age. One reason for doing this is that there are too many additional variables involved in retirement, including retirement age, spouse’s retirement age, working part-time during retirement, average monthly spending and investing savings.

Another contributor is lack of knowledge. Fifty-two percent of survey respondents were uninformed about strategies to maximize Social Security benefits in general, and 62% had not actively looked for information regarding Social Security. Eighty percent said the Social Security Administration website would be their primary source of information, and only 25% mentioned a financial adviser. Sixty-one percent have not discussed their Social Security decision with anyone.

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Eighty-three percent of respondents were concerned about the viability of Social Security. Currently, however, there is a large surplus credited to the Social Security Trust Fund. The Brookings Institute estimates that even in 2022, the Social Security Trust Fund will have a surplus of $3.7 trillion in reserves. While more and more Baby Boomers retire, the annual amount of total revenue received will exceed the inflows from taxes, and barring any changes to the system, the surplus is expected to run out in approximately 2036, the report said. For someone turning 66 now, that will be when they are 90. Even then, however, without any changes, Social Security will still be able to pay close to 80 cents for every $1 of benefit. 

The BMO study also found that Social Security benefits have become synonymous with retirement. Sixty-four percent of those taking their Social Security benefits past FRA were doing so because they worked past this age. For those claiming early, 69% said it was because they were no longer working (46% retired early, 23% lost their job or were forced to retire). Therefore, the claiming decision appears to be largely based on employment status rather than on any strategic long-term approach to lifetime income.

Another benefit retirees seem to be unaware of is spousal option, with almost half (49%) of survey respondents saying they were not knowledgeable about it. Fifty-six percent say they are not at all or not very knowledgeable about widow benefits; 39% are unaware they can receive up to 50% of their spouse’s benefit; and 47% do not know a widow gets 100% of her spouse’s benefit.

Earlier BMO report findings stress the importance of being prepared for the possibility of being single in retirement. Research found that 27% of those 65 and older were widowed, and 12% were divorced. Therefore, almost four in 10 will be able to make a claim on a spouse or former spouse’s benefit, so it is important to know the basic benefit rules for widows and divorced spouses.

Divorced spouses need to be aware they can apply for the same benefits as married spouses. The basic rules for divorced spouses are that the marriage must have lasted for 10 years, they must be at least age 62 and not currently married. As long as they have been divorced for two years, then they only need their ex-spouse to be eligible for benefits; they don’t have to wait for them to actually file for them. Furthermore, assuming they have not remarried, divorced spouses are eligible for the 100% widow benefits.

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Ideally, Social Security benefits should be part of a financial plan that includes other income sources and should be discussed as a strategy. Social Security is one of the few retirement income sources that comes with a built-in cost-of-living adjustment (COLA), which is a big advantage when it comes to combating inflation’s erosion on buying power, BMO said. Therefore, it is vital that couples discuss their strategy for taking Social Security as part of their retirement plan.

The survey revealed that only 54% of retirees have a financial plan. While those ages 45 to 54 are the least likely to have a financial plan (only 42% have one), they are at an ideal time to start thinking about their retirement income and to identify any shortfalls in savings. The survey asked those who had already retired what advice they would provide to preretirees, and 69% of those already in retirement recommended that preretirees make a financial plan.

The BMO report, “Retirees not maximizing Social Security retirement benefits,” is available here.