If you're like most Americans, when you retire, you'll count on Social Security for at least some portion of your retirement income. And since you can start claiming your payments as early as age 62 (at a reduced rate) or delay to as late as age 70 (for a higher monthly benefit), you're probably unsure exactly when you should apply.
The truth is, there isn't one right answer. There are numerous factors that make every person's situation unique, and the age that makes sense for one person may not make sense for you. So, instead of trying to find the answer to the "when" question, here's a closer look at three big things that affect when you should apply.
The difference in claiming early versus late
For the average American, it really doesn't matter whether you apply early and take a smaller benefit or wait until later for a bigger check, since you'll probably get about the same amount in total dollars. In other words, the system is structured such that it's largely about providing people flexibility as to when they'll start getting their benefit.
This table shows how much more or less your monthly benefit would be, based on when you apply and start receiving payments.
So, you're looking at a 25% monthly deduction if you elect to file early and get more checks, or a 32% increase if you delay to age 70 and get fewer checks over your life. But again, you'd collect about the same amount of money if you live an average life expectancy.
However, there are some circumstances that can dictate taking a benefit as early as possible, while other situations make it more prudent to apply as close to age 70 as possible, and receive the biggest monthly benefit. Let's move to the biggest reason why you may want to apply as early (or as late) as possible: your health and family history.
Health and family history may mean you should claim early (or late)
For the average American, your total benefits paid over your lifetime aren't going to be significantly different whether you claim early, later, or somewhere in the middle. Here's a table that shows how much you'd get in total payments at different ages, based on when you claim, using a theoretical $1,000 per month benefit at age 66 (the current full retirement age):
As you can see in the table above, the only circumstance where filing early means more money is if you don't live beyond your mid-70s. On the other end of the spectrum, you'd have to live beyond age 85 to guarantee more money by delaying to age 70.
And while health and family history is an important consideration, there's one that may be more important for most pre-retirees: other income sources.
Other retirement income sources
Social Security is an important source of income in retirement, but it's not enough to make ends meet for the majority of retirees. This is where your other pensions, retirement savings, potential work salary, and even your home equity come into play.
One common method used to determine if your retirement assets are sufficient to support you in retirement is the so-called "4% Rule." The 4% rule is based on taking a 4% distribution from your retirement assets in your first year of retirement and then taking that same amount each following year, plus inflation (historically a little more than 2% per year).
For example, if you had $1 million in retirement savings, you could count on $40,000 in year one and $40,800 in the second year based on 2% inflation. If you have only $100,000 in retirement savings, you're looking at $4,000 per year -- about $334 per month -- before adjusting for inflation.
Once you determine how much income your retirement savings will generate, add in any income sources such as pensions or annuities to determine how much income you can conservatively count on before Social Security. And once you know this number, you'll be able to determine what age your Social Security benefit will be enough to cover your expenses in retirement.
Housing debt and costs
How much you pay for things like housing are critically important to when you should file for Social Security, particularly if you're still carrying mortgage debt into retirement. The percentage of older Americans who own their homes has declined in recent years, while a larger percentage of those who do own their homes have mortgages than in prior years. As a matter of fact, the percentage of those 65 and over with a mortgage has doubled over the past two decades.
This is a major reason that one of the biggest struggles many retirees face is high housing costs. According to a Harvard University study, retirees with high housing costs tend to spend less on important things like food, medicine, and healthcare, all of which can have a negative effect on your health and quality of life in retirement.
Think beyond the spreadsheet
For the most part, deciding when to file for Social Security will be a financial one. But we each must also consider other things, including when we want to stop working full-time, having more active years before Father Time eventually slows us down, and a litany of other considerations beyond dollars and cents.
Before you circle a date on your calendar, make sure to consider the three things discussed above. But don't stop there, and don't only consider the financial aspects. Retirement is both the end and the beginning of a lot of things. Be sure you're ready emotionally as well as financially before you take such an important step.
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