Few will wait until 70 to receive maximum Social Security payments, study finds

Only 10% of non-retired Americans will wait until 70 to receive their maximum Social Security benefit payments, according to the 2023 Schroders U.S. Retirement Survey. This includes 17% of non-retired respondents on the verge of retirement.

Overall, 40% of non-retired respondents plan to take their Social Security benefits between the ages of 62-65, leaving them short of qualifying for maximum Social Security payments. The choice to forgo larger Social Security payments is a deliberate one, as 72% of non-retired investors and 95% of non-retired ages 60-65 are aware that waiting longer earns them higher payments, the survey said.

Forgoing maximum Social Security payments

So why are so many non-retired Americans taking their Social Security benefits before they reach 70 when they would qualify for maximum Social Security payments? According to the survey:

• 44% said they were concerned Social Security may run out of money/stop making payments.
• 36% said they will need the money.
• 34% said it was their money and they wanted access to it as soon as possible.
• 13% said they were advised to take it earlier than age 70.

“We have a crisis of confidence in the Social Security system and it’s costing American workers real money,” said Deb Boyden, head of U.S. defined contribution at Schroders. “Fear about the stability of Social Security has people walking away from money that could improve their quality of life in retirement. Many are not even waiting for their full benefit let alone the maximum, which means they will have to create more income on their own, making it even more important to save and invest earlier for retirement.”

Amount needed to retire comfortably

When survey participants were asked to forecast how much monthly income they will need to enjoy a comfortable retirement, non-retired survey participants said $4,940, on average. This includes non-retired millennials, who said $5,135 per month; and those who are nearing retirement (ages 60-65), who said $4,855 per month.

Retirees also said that including Social Security, their total monthly income is $4170 on average, though 37% said their monthly income is less than $2,500.

The benefits of working with an advisor

Having an advisor and a plan pays off, the survey pointed out. The average monthly income, including Social Security for retirees with a financial advisor, is $5,075. For retirees with a formal financial plan, the monthly income is $5810 on average, which is almost twice the $3,000 per month of income reported by those without a financial plan.

In addition, among working Americans participating in a workplace retirement plan, 32% said their plan provided a retirement income solution; 39% said they didn’t know; and 29% said no.

The vast majority (82%) of those who are offered an income solution in their plan are likely to use it. Among those who don’t know or do not have a retirement income solution in their plan, 55% said they wish they did – including 64% of those nearing retirement (ages 60-65) – while 33% were unsure, and 12% said it wasn’t necessary.

“Americans are increasingly looking to their employers for insights and solutions to their retirement income challenges,” Boyden said. “While this has been a topic of conversation for some time, we believe we are entering a phase of accelerated adoption among plan sponsors for solutions to meet these challenges, with products that provide lifetime income, while addressing sequence of return risk with principal protection, and giving investors the flexibility to take the income when they want or need it.”

The idea of no more paychecks is terrifying

The idea of having no more regular paychecks in retirement is not only concerning to 57% of non-retired Americans, but is also terrifying for another 23%, the survey noted.

Those surveyed also have low final paycheck-income replacement expectations. Only 23% believe they will need to replace 75% or more of their final paycheck with other sources of income in retirement. Thirty-two percent said between 50-74%; 23% said they needed to replace less than 50%; and 22% had no idea.

For retirees, the majority (51%) of them are able to replace less than 50% of their last paycheck; 26% are able to replace 50-74%; and 24% can replace 75% or more.

Plans to generate income when retired

How will non-retired Americans generate income in retirement? Aside from Social Security, the survey said that they expect to also use:

• Cash savings (58%)
• Workplace retirement plan (53%)
• Investment income apart from employer provided retirement plan (40%)
• Defined benefit/pension plan (20%)
• Rental income (14%)
• Annuities (10%)
• Cash value of life insurance (10%)
• Reverse mortgage (4%)

Turning savings into income

According to the survey, retirees use a variety of specific strategies to turn their savings into income, including:

• Systematic withdrawals from retirement accounts (33%)
• Dividend producing stocks or mutual funds (24%)
• Annuities (13%)
• Individual bonds or bond mutual funds (12%)
• CDs (12%)

However, almost half (49%) said they don’t have any retirement income strategies; they just take money when they need it.

Creating a retirement income strategy

As advisors work with their clients to develop a retirement-income strategy, it is important for them to start with a holistic view of the clients’ financial goals and investments, according to MDRT member Domenick D’Andrea, co-founder/financial advisor at DanDarah Wealth Management.

“Looking specifically at retired clients, what is their current form of income and how is that performing for their needs?” he asked. For example, maybe they started taking their Social Security payments at age 62. This is earlier than advised and will cause the client to lose out on a fair amount of growth, he said.

“You can advise them on ways to make up for the loss of growth,” he added. “Depending on their needs, I will often suggest an annuity as a part of their plan. Retirees may forget that even though their work has stopped, life expenses will not, and they will need to be prepared for this. Provide a few different options, such as a buffer annuity if they don’t need the income any time soon, a short-term option, or simply re-evaluating current investments may be the answer.”

Of course, it’s best to develop these plans before someone retires, but for situations in which a client is getting a later start, the advisor can still find products to help them meet their goals, he added.

Another MDRT member Bryson Milley said that with his retired clients, they keep 2 – 3 years’ worth of income in laddered Guaranteed Investment Certificates (GICs), which are CDs in the U.S.

“This way, when the markets go down as they did in 2022, we are not forced to redeem any market-based investments for retirement income in those years, “ added Milley, who is a financial advisor at RGF Wealth Management. “Instead, we use cash from dividends and a maturing GIC to fund the following year’s income. And if this happens for multiple years, we have multiple GIC’s to fall back on. Then, in the really good years, we replenish the GIC positions so we’re ready when it happens again.”

In this way, he added, the investment portfolio is left to recover before there is a need to sell anything, which helps protect and extend the client’s capital further into the future.

The survey was conducted by 8 Acre Perspective among 2,000 U.S. investors nationwide ages 27-79, including respondents between ages 27-44 for the first time. It was conducted from February 13 to March 3 in 2023. The median household income for the working Americans surveyed was $75,000.

Ayo Mseka has more than 30 years of experience reporting on the financial services industry. She formerly served as editor-in-chief of NAIFA’s Advisor Today magazine. Contact her at [email protected]. 

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