Social Security is undoubtedly a great source of retirement income for many people, and for some, it's their only source. After years of working and paying Social Security taxes, you can begin receiving monthly benefits as early as age 62. However, Social Security uses the year you were born to determine your full retirement age (FRA).
| Birth Year | Full Retirement Age |
|---|---|
| 1943 to 1954 | 66 |
| 1955 | 66 and two months |
| 1956 | 66 and four months |
| 1957 | 66 and six months |
| 1958 | 66 and eight months |
| 1959 | 66 and 10 months |
| 1960 or after | 67 |
Data source: Social Security Administration.
If you begin taking benefits at age 62, it's considered early, and Social Security will reduce your benefits based on how far you're away from your FRA. If you retire within 36 months of your FRA, benefits are reduced by five-ninths of 1% for each month. Any months over 36 will be reduced by five-twelfths of 1% per month. You can also delay your benefits until you reach age 70, increasing the monthly payout.
Image source: Getty Images.
How benefits are calculated
Social Security determines your monthly benefit by first figuring out your lifetime earnings. They'll then adjust your earnings to account for changes in average wages since the year you received the earnings. Next, they take the 35-year span where you earned the most and calculate your average adjusted monthly earnings. Lastly, a formula is applied to your earnings to get your primary insurance amount, which is the benefit you'd get if you began taking them at your FRA.
If you retire at your full retirement age in 2022, the maximum monthly benefit is $3,345; if you retire at 62, it's $2,364; if you delay your benefits until 70, it increases to $4,194.
The higher payout is overrated
Although waiting until 70 to begin receiving your benefits seems lucrative because of the higher payout, it can be misleading when you consider how many payments you'd miss out on between your FRA (or early retirement) until then. There are 36 months between 67 and 70, as well as 96 months between 62 and 70. That's a lot of missed checks.
Let's imagine you were born in 1975 and currently make $100,000. Here are your expected monthly benefits, according to Social Security's benefits calculator.
| Age You Begin Receiving Benefits | Monthly Benefit | Total Received by 80 | Total Received by 85 |
|---|---|---|---|
| 62 | $1,901 | $410,600 | $524,600 |
| 67 | $2,766 | $431,500 | $597,400 |
| 70 | $3,474 | $416,800 | $625,300 |
Data source: Social Security Administration.
If maximizing the total amount of benefits you receive is your reasoning for delaying until 70, be aware that won't likely become the case until you're well into your 80s. As the table shows, even 10 years after taking benefits at 70, you would still have received less overall than had you taken the lower benefits beginning at 67.
You want to maximize retirement
If you delay your Social Security benefits until you're 70, those are some quality retirement years when you could have been receiving something. Retirement is a reward after decades of hard work, and you should try your best to maximize that -- however that looks for you.
Delaying benefits until 70 may make financial sense if you live well into your mid-80s and longer, but nobody knows what the future holds. There's no need to delay receiving the fruits of your labor that long.
