Seniors will make a lot of important decisions, but few, if any, have as much bearing as deciding when to begin taking their Social Security retirement benefit.
Every month, over 63 million people receive a benefit from the most successful social program in our nation’s history — and 70% of those recipients (and climbing) are retired workers. Of these retirees, more than 3 out of 5 lean on their monthly payout to account for at least half of their monthly income. Therefore, these claiming decisions can have a huge impact on how much retirees will be receiving monthly, as well as over their lifetime.
Your claiming age has a big impact on how much you’ll receive from Social Security
As you may be aware, there are a handful of factors that go into determining what you’ll be paid on a monthly basis by Social Security, assuming you’re eligible to receive a retired worker benefit and have reached the eligible claiming age.
The first two factors — work history and earnings history — go hand in hand. The Social Security Administration (SSA) takes your 35 highest-earning inflation-adjusted years into account when determining your payout. This is why working a minimum of 35 years is so important, otherwise you’ll have $0’s averaged in for each year less of 35 worked.
A third important factor is your birth year, which determines your full retirement age (also known as “normal retirement age” by the SSA). Your full retirement age is the age at which you become eligible to receive 100% of your monthly payout, with most upcoming retirees likely having a full retirement age of 67. If you begin taking your benefit prior to reaching your full retirement age, you’ll be accepting a permanent reduction to your monthly payout. Likewise, waiting until after your full retirement age can actually boost your payout above 100%.
That leads to the fourth — and arguably most important — factor that determines what you’ll receive each month: your claiming age. You can begin taking your payout as early as age 62, however, the SSA incentivizes seniors to wait. For each year you hold off on taking your benefit, your payout will grow by approximately 8%, up until age 70. All things being equal, an individual claiming at age 70 could net as much as 76% more per month than an individual claiming at age 62, with the trade-off being that the person claiming at age 62 would receive a payout for eight years before the 70-year-old would net their first check.
Given that everyone’s financial and personal situations differ, and that we (thankfully) don’t know our expiration date, there is no perfect game plan on when to take benefits, which can make it tricky for folks to decide on their optimal claiming age.
This is the worst possible age to claim Social Security benefits
With this in mind, money management solutions company United Income set out to explore how much retirees would gain if they improved their Social Security claiming decisions.
In a recently released report, “The Retirement Solution Hiding in Plain Sight,” United Income analyzed data from approximately 2,000 households via the University of Michigan Health and Retirement Study (HRS). The authors at United Income examined the real-world Social Security claiming decisions of these households over a long period of time, and then compared them to what the optimal claiming decision would have been (i.e., at what age would these individuals or couples netted the most lifetime income from Social Security).
Interestingly, the actual claiming curve and the optimal claiming curve were almost perfect inversions of one another. Whereas close to 80% of the seniors in the HRS began taking their payout before age 65, the authors found that the optimal claiming age for these individuals was usually after their full retirement age. The data showed that 57% of individuals had an optimal claiming age of 70, which compares to the 4% of seniors today who are actually waiting until age 70 to take their benefits.
On the other end of the spectrum, claiming early proved to be nonoptimal for a lot of folks, with age 64 being, statistically, the worst age to take Social Security benefits. Although the authors didn’t provide a breakdown for each age (aside from age 70), they do mention that just 6.5% of beneficiaries would have made an optimal claim between ages 62 and 64. Simply eyeballing the chart provided, it looks as if around 1% of all retirees would have made their best possible claiming choice at age 64.
Waiting works for most people, but there’s still no perfect claiming guideline
According to the data provided, a majority of seniors would be more financially secure, in terms of boosting their lifetime earning potential from Social Security, by waiting to take their benefit.
Unfortunately, no one knows if they’re going to be in the majority. Sure, 57% of seniors should net more from the program by claiming at age 70, but this also suggests that an earlier claim would work for 43% of analyzed workers in the HRS. We’ll never know with any certainty if we’ve made the best possible choice until many years after the fact.
So, what can you do to ensure you get the most out of Social Security? The best suggestion I can pass along is take the time to decipher what variables matter to you. Though none of us knows our expiration date, we can use our health history, and that of our immediate family members, to formulate ideas on our longevity that can aid our claiming strategy.
Likewise, examine your financial situation. If you’re nearing retirement age but don’t have much saved for retirement, then consider working longer and allowing your payout to grow over time.
Also, take your marital status into account. If you’re a single individual, then your claiming decision will affect you and you alone. However, if you’re married, your claiming decision could impact your spouse’s ability to collect a larger survivor benefit if you were to pass away first. This is especially important if you’re the household earnings breadwinner.
Without a time machine, we’ll never know our optimal claiming age. But, at least based on the data provided by United Income, we know that age 64 is most likely not it.
