You may not realize it, but there’s a very good chance that you’ll be reliant on Social Security, to some degree, to make ends meet during retirement. According to Gallup’s April 2019 surveys, a record-tying 90% of current retirees lean on Social Security as a necessary part of their monthly income, while a near-record 83% of nonretirees expects Social Security to be a “major” or “minor” income source in their golden years.
With all of this being said, few if any decisions are going to prove more important than when you decide to begin taking your Social Security retirement benefit.
Your Social Security claiming age has a gigantic impact on your monthly payout
As you may already know, there are over a half-dozen factors that can affect your final take-home from Social Security. However, four stand out.
The first two, your work history and earnings history, will help the Social Security Administration (SSA) determine your average monthly benefit over your 35 highest-earning, inflation-adjusted years. For every year less of 35 worked, a $0 is averaged into your total. This is why it’s recommended that you work at least 35 years, if not longer, if you want to improve your payout from the Social Security program.
The third factor that plays a critical role is your birth year, which is instrumental in determining your full retirement age (or what the SSA calls “normal retirement age”). Your full retirement age is the point at which the SSA deems you eligible to receive 100% of your monthly payout. If you claim your benefit prior to reaching your full retirement age, you can expect a permanent reduction to what you’ll receive on a monthly basis. Meanwhile, if you begin taking your payout after your full retirement age, it could grow even larger than 100%.
The fourth and final factor, as promised, is your claiming age. Retired worker benefits can begin at age 62, or any point thereafter, with your payout increasing by as much as 8% annually for every year you hold off, up until age 70. All things being equal, such as earnings history, work history, and birth year, an individual claiming at age 70 could net as much as 76% more per month than someone claiming at age 62. On the flipside, the reduced-payout senior will receive a benefit check for eight years from the SSA before the individual at age 70 nets a dime from the program.
Statistically, claiming at this age is the smartest thing you can do
What do most seniors choose to do, you ask? According to SSA statistics, around 60% will claim their payout between ages 62 and 64, quickly gaining access to income during retirement, but ensuring that they receive a permanent reduction to their monthly benefit. Comparatively, around 30% will claim at ages 65 or 66 (right around full retirement age), with roughly 10% taking their benefit between ages 67 and 70.
The $64,000 question is, which claiming strategy is best?
In the most literal sense, this is a question that can never be answered with certainty. That’s because we, thankfully, don’t know our expiration date. If we did, we could make an informed decision about which claiming age would generate us the most lifetime income.
However, the data is crystal clear that if seniors claim their payout at one specific age, they’ll be giving themselves the best possible chance to maximize what they’ll receive from Social Security.
In June, United Income released a study entitled “The Retirement Solution Hiding in Plain Sight” that compared the actual claiming decisions of seniors in 2,000 households to what the optimal claiming decision would have been for these retirees. Not surprisingly, a vast majority of people made a sub-optimal claim. But what really stood out is United Income laying out what ages would have led to an optimal claim by seniors in these households.
As noted in the report, 57% would have received more in lifetime income from Social Security if they had waited until age 70 to begin taking their payout. In other words, patience pays off handsomely when it comes to Social Security.
By comparison, fewer than 1 in 10 retired workers made an optimal claiming decision by taking their payout at ages 62, 63, or 64, combined.
It’s not a cut-and-dried decision
Based on this data, and assuming it would translate to a broader swath of the retired population, waiting as long as possible to take your Social Security benefit increases your odds of an optimal claim. But there are still going to be instances where an earlier claim would make sense.
For example, people with one or more chronic illnesses may not reach the average life expectancy in the U.S. of almost 79 years. The 78-to-80 age range tends to be the inflection point where lifetime benefits received from Social Security for all for the various ages equalize. Thus, if you live longer than age 80, a later claim will have proved prudent. Comparatively, an early claim would make more sense if you only live until your late 60s or early 70s. If you have a chronic health condition, such as heart disease, diabetes, or cancer, an earlier claim may have merit.
Another instance involves unemployed seniors with no other sources of income. Although the unemployment rate among seniors is relatively low, it can be difficult for seniors to find employment once they’re out of the workforce. Without adequate savings, seniors might be forced into an early Social Security claim. Considering the options available, including a Social Security mulligan within 12 months, an early claim might be the best choice.
The point is that while, statistically, an age-70 claim gives you the greatest chance to maximize your lifetime earnings from Social Security, it’s still not a guarantee — and nothing ever will be.