For many people, Social Security is one of the main sources of income in retirement. After years of working and paying Social Security taxes, retirement presents an opportunity to finally reap some of the benefits.
A lot of factors go into determining how much you receive from Social Security, including when you decide to start receiving checks. Some people choose to delay their benefits because the payout is higher that way, but here's why that can be slightly misleading.
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It starts with your full retirement age
Social Security decides your full retirement age based on the year you were born. It's as follows:
| Birth Year | Full Retirement Age |
|---|---|
| 1943 to 1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or after | 67 |
Data source: Social Security Administration.
You don't have to wait until your full retirement age to begin receiving benefits; you can start at 62. But you will not receive your full benefit until you reach your full retirement age (FRA). Benefits are reduced by five-ninths of 1% for each month you claim before your FRA, up to 36 months. If you retire and start taking benefits more than 36 months before your FRA, any months over 36 will reduce your amount by five-12ths of 1% per month.
On the other hand, your benefits will be increased if you decide to delay beyond FRA, until you reach 70. The maximum benefit anyone can receive depends on the age they retire. If you retire at your FRA in 2022, the maximum monthly benefit is $3,345. If you retire early at 62 in 2022, the maximum benefit is $2,364. And if you delay your benefits until 70, your maximum benefit increases to $4,194.
Delaying benefits can be overrated
Although your monthly payout increases if you delay your benefits until 70, doing so can be a bit overrated. Yes, you'll receive more per check, but you also have to consider how many checks you'll miss out on waiting until then. If your full retirement age is 67, there are 96 months (and therefore 96 checks) between age 62 and 70, and 60 checks between age 62 to 67.
To get an idea of how increased Social Security payouts can be misleading, let's check out a scenario where someone was born in 1980 and currently makes $100,000. Using Social Security's benefits calculator, here's the expected monthly payment and total payout at certain ages:
| Age of First Benefits | Monthly Benefit | Total Received by 80 | Total Received by 85 |
|---|---|---|---|
| 62 | $1,952 | $421,630 | $538,700 |
| 67 | $2,846 | $443,900 | $614,700 |
| 70 | $3,538 | $424,500 | $636,800 |
Data source: Social Security Administration.
As you can see, if you waited until 70 to receive benefits, by the time you reached 80, you would have received less overall than had you begun at age 67, and almost the same amount had you begun at age 62. By age 85, you would have received a bit more overall had you waited until 70. But plenty of people don't live to age 85, so it's hard to assume someone will make it there to make the trade-off worth it.
Enjoy the present
At some point, it's worth asking yourself if putting off benefits for the higher monthly payout is worth all the time spent without receiving some type of payout. Retirement should be about finally being able to enjoy the fruits of your labor. You might want to travel the world; you might want to take on a new hobby. Whatever the case may be, you've worked a long time and should enjoy the present. Don't delay your benefits.
