For many Americans, Social Security represents more than just a monthly check you’ll receive during retirement. It’s a financial foundation that’s responsible for pulling more than 21 million people out of poverty each month (nearly 15.4 million of whom are adults aged 65 and over), and a source of income that helps between 80% and 90% of current retirees cover their expenses.
Getting as much as you can out of Social Security (by making an optimal claim) is paramount to the financial well-being of most future retirees. But in order to do so, you’ll need to understand how your claiming decision, along with other key factors, affects how much you’ll receive each month.
There are a number of factors that have the ability to reduce what you’ll get to keep from Social Security, such as whether or not your benefits are exposed to federal or state-level taxation. But when chiseled down to the basics, four components are used by the Social Security Administration (SSA) to calculate retired-worker benefits:
Full retirement age
The first two factors — earnings history and work history — play off one another. In simple terms, the more you earn, the higher your Social Security check will be during retirement.
But there is a caveat to the previous statement. The SSA will take your 35 highest-earning, inflation-adjusted years into account when calculating your monthly payout. For every year less than 35 worked, a $0 will be averaged in. Thus, you’ll want to work at least 35 years if you have any hope of maximizing what you’ll receive.
The third key component is your full retirement age. This describes the age at which you become eligible to receive 100% of your retired-worker benefit, and it’s determined by the year you’re born. For persons born in 1960 or later, which encompasses most of the existing labor force, the full retirement age is 67.
The fourth and final factor, and the one that can really swing the pendulum for or against you in the payout column during retirement, is your claiming age. Though eligible beneficiaries who’ve earned the requisite 40 lifetime work credits can begin receiving their retired-worker check at age 62, waiting has its perks. For every year a beneficiary waits to claim their benefit, beginning at age 62 and continuing through age 69, their monthly payout can grow by as much as 8%, as shown in the table below.
1960 or later
As you can see, there’s a huge gap in benefits between early and late filers.
Future generations of retirees who want their money as soon as possible (age 62) would be accepting up to a 30% permanent reduction in their monthly benefits. Meanwhile, people born in or after 1960 who wait until age 70 to begin receiving their benefits could net 24% above what they’re due at full retirement age (age 67). Based on the average retired-worker benefit of $1,843.96 in September, this hypothetical early filer versus late filer scenario works out to a difference of almost $1,000 per month.
The all-important question is: What are the best and worst ages for retirees to claim a Social Security benefit?
Although we’ll never know this answer with concrete certainty — you’d need to know your date of “departure” to ensure you’ve made an optimal claim — a comprehensive analysis conducted four years ago sheds light on what strategies offer the highest and lowest probabilities of success for retirees.
In 2019, the researchers at online investment planning company United Income examined the claiming decisions of approximately 20,000 retired workers using data from the University of Michigan’s Health and Retirement Study. The purpose of this examination was to see if retirees made optimal choices — that is, took their benefits at the age that generated the highest possible lifetime income. (Understand that the highest monthly payout may not equate to the highest lifetime income.)
What United Income uncovered was that optimal claims and actual claims were almost perfect inverses of one another. While most retirees took their payout prior to reaching their full retirement age, optimal claims typically occurred at or after full retirement age.
United Income’s extensive study found that age 64 was the worst possible claiming age — the one with the lowest percentage of optimal claims. The other three ages that generated very low probabilities of success, in terms of optimal claims, were 62, 63, and 65.
All four of these claiming ages (62 through 65) are prior to the current full retirement age, and would therefore expose any future retirees to possible early filer penalties. In addition to permanently reduced monthly benefits, early filers can be subjected to the retirement earnings test. This “penalty” allows the SSA to withhold some or all of a worker’s benefits, based on how much they earn.
On the flipside, United Income’s study pointed to one age that’s head and shoulders above the rest for optimal claims. A grand total of 57% of the 20,000 claimants examined would have made the best possible choice by taking their payouts at age 70. Though not everyone has the luxury of waiting eight years, post-eligibility, to begin receiving their Social Security check, United Income’s back-tested analysis demonstrates an overwhelming benefit to age 70 claims.
Ultimately, the health, marital status, and financial needs of future retirees will play the most important role in their claiming decision. But based on statistics, a later claim gives most retired workers the best chance to maximize their lifetime benefits.
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