According to the latest monthly data release from the Social Security Administration (SSA), just over 42 million retired workers were receiving a benefits check from the SSA. Out of these more than 42 million seniors, the data shows that more than 25 million of them are reliant on Social Security for at least half of their monthly income. A history of poor saving habits and the wrong investment choices has left the current generation of retirees, and likely future generations, particularly reliant on Social Security.
This reliance on the program means that now, more than ever, workers and pre-retirees need to be focusing on the three factors they can control to maximize their monthly payout.
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You control these aspects of your Social Security benefit
Two of these factors are intricately tied to one another: work history and earnings history. The SSA will factor in your 35 highest-earning years when calculating your Social Security benefit, meaning it's in your best interests to work at least 35 years, if not more, and to earn as much as you possibly can in those years you do work. Working well into your 60s can be particularly beneficial, as you'll have the skills and experience needed to command a higher wage, which may be able to boost your average annual earnings and lift your Social Security benefit.
The third factor you control is your claiming age. What really matters here is when you claim relative to your full retirement age (the age the SSA deems you eligible to receive 100% of your retirement benefit) -- and it should be noted that your full retirement age (FRA) is determined by your birth year. You can enroll as early as age 62, or at any point thereafter, but the general rule is this: Claim before your FRA and you'll accept a permanent reduction to your monthly benefit, or claim after your FRA and you'll receive an even higher payout. Generally speaking, each year you wait to sign up for benefits increases your eventual payout by 8%, until age 70.
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Claiming at age 62 is a terrible idea if you're in one of these two scenarios
So most Americans are waiting until age 70 and maximizing their payout, right? Not exactly. In fact, data from the Center for Retirement Research at Boston College found that only 3% of seniors wait until age 70 to enroll. Comparatively, 45% of seniors choose to enroll at age 62, the earliest age possible, and are thus accepting up to a 25% to 30% permanent reduction in monthly benefits compared to their FRA benefit.
However, it should be pointed out that some people benefit greatly from claiming Social Security early, in spite of a permanent reduction in benefits. Those in poor health, for instance, can often maximize their lifetime payout by collecting sooner rather than later.
But for certain groups of folks, claiming at age 62 is an absolutely terrible idea. Should you find yourself in one of the following two scenarios, you should seriously consider holding off on claiming Social Security benefits until your FRA, or later.
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1. You've saved very little or nothing for retirement
Perhaps the most dangerous scenario is for baby boomers and those in Generation X that could enter retirement with very little saved, or perhaps even nothing. The lure of a quick payday via Social Security might entice these folks to enroll as soon as they turn 62. Unfortunately, boomers and Gen-Xers will be in for an unpleasant surprise if they do claim early.
Claiming as soon as possible means accepting up to a 25% to 30% permanent reduction from what you would have received at your full retirement age. If you have next to nothing saved, you're likely to be reliant on Social Security for the remainder of your life, which means you should be aiming to maximize, not minimize, what the program pays you. What these folks should be doing, assuming they're in good health, is working well into their 60s or 70s and allowing their Social Security benefit to grow by 8% per year.
Claiming early with little or nothing saved is also a dangerous proposition considering that the latest report from the Social Security Board of Trustees is forecasting up to a 23% cut in benefits by 2034 if Congress does nothing. This cut is predominantly the result of a rapidly growing base of beneficiaries and lengthening life expectancies. If boomers haven't saved much and they claim Social Security benefits early, they'll not only accept a 25% to 30% haircut in benefits from their FRA benefit, but they could also see a further 23% reduction by 2034.
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2. You're the clear higher-earning spouse
Another really bad idea would be to claim benefits at age 62 if you're the clear higher-earning spouse. While the prospect of a quick boost in your combined household income might be alluring, it could have two devastating consequences.
To begin with, if the ultimate goal is to maximize household income for the couple, it makes more sense to allow the payout for the higher-earning spouse to grow over time than it does to let the payout for a much lower-earning spouse grow. In fact, it often makes sense for the lower-earning spouse to claim early so as to generate some income for the household, allowing the higher-earning spouse's benefit to remain untouched.
Just as important, your claiming history can affect what your partner receives should you be the first one to pass away. Ideally, a higher-income spouse will wait until his or her FRA or after to claim benefits. If the higher-earning spouse dies first, the lower-income spouse will then have the option of taking a survivor benefit based on the earnings history of the deceased spouse, as long as it results in a higher monthly payment than what or she would receive from work and earnings history. Claiming early can lower this survivor benefit, potentially setting your partner up for financial struggles once you're gone.
Though each person's situation is unique and there's no concrete rule on when a person should claim Social Security benefits, if you find yourself in either of these scenarios, take a good, long look at your choices before enrolling at age 62.
