Although it's a program that's out of sight and out of mind for decades of our lives, Social Security is, unquestionably, our nation's most successful social program.
According to surveys conducted earlier this year by national pollster Gallup, 89% of current retirees are leaning on their Social Security benefit as a "major" or "minor" source of income in their golden years. As for nonretirees, 84% expect to rely on their Social Security income to some degree to make ends meet in retirement.
Image source: Getty Images.
What's more, an analysis from the Center on Budget and Policy Priorities (CBPP) found that Social Security's existence has dramatically reduced elderly poverty rates. According to the CBPP, the poverty rate for those aged 65 and over would be 38% if Social Security didn't exist. That compares to a poverty rate of 9%, as of March 2021, with Social Security.
Considering how important Social Security income is, or will be, for the vast majority of Americans, there's arguably no decision more important than your claiming age.
Here's how your Social Security benefit is calculated
There are a lot of factors -- more than a half-dozen, to be exact -- that determine what you'll be paid on a monthly basis via Social Security during retirement. But there are, ultimately, four factors that have the biggest bearing on your retirement benefit.
As I've previously pointed out, two of these factors are truly linked at the hip: your work history and earnings history. The Social Security Administration will take into account your 35 highest-earning, inflation-adjusted years when calculating your monthly benefit. Each year less than 35 worked results in $0 being averaged into the calculation.
The third factor that impacts your monthly retirement benefit is your birth year. Your birth year is used to determine your full retirement age, which is the age where a beneficiary becomes eligible to receive 100% of their monthly payout. Think of your full retirement age as a line in the sand. If you begin taking your payout prior to reaching this line, your monthly benefit will be permanently reduced. By comparison, your monthly payout can exceed 100% if begun after your full retirement age.
The fourth factor, as you might have guessed, is your claiming age. Eligible recipients can begin taking their benefits as early as age 62 but are incented to hold off. That's because monthly benefits can grow by as much as 8% annually for every year you hold off on taking your payout, up until age 70.
The most important Social Security table you'll ever see
Among these variables, none has the potential to impact what you'll receive on a monthly basis from Social Security more than your claiming age. You could rightly say that this Social Security table could very well determine your financial well-being in retirement.
The percentages in the table reflect how much of your full retirement benefit you would expect to receive based on your birth year and the year you began claiming your payout. As you can see, depending on your claiming age, this could result in your monthly benefit being slashed by as much as 30% on a permanent basis or increased by 24% to 32%. That's a wide variance, which could lead to big-dollar implications.
| Birth Year | Age 62 | Age 63 | Age 64 | Age 65 | Age 66 | Age 67 | Age 68 | Age 69 | Age 70 |
|---|---|---|---|---|---|---|---|---|---|
| 1943-1954 | 75% | 80% | 86.7% | 93.3% | 100% | 108% | 116% | 124% | 132% |
| 1955 | 74.2% | 79.2% | 85.6% | 92.2% | 98.9% | 106.7% | 114.7% | 122.7% | 130.7% |
| 1956 | 73.3% | 78.3% | 84.4% | 91.1% | 97.8% | 105.3% | 113.3% | 121.3% | 129.3% |
| 1957 | 72.5% | 77.5% | 83.3% | 90% | 96.7% | 104% | 112% | 120% | 128% |
| 1958 | 71.7% | 76.7% | 82.2% | 88.9% | 95.6% | 102.7% | 110.7% | 118.7% | 126.7% |
| 1959 | 70.8% | 75.8% | 81.1% | 87.8% | 94.4% | 101.3% | 109.3% | 117.3% | 125.3% |
| 1960 or later | 70% | 75% | 80% | 86.7% | 93.3% | 100% | 108% | 116% | 124% |
Data source: Social Security Administration. Table by author.
As you'll note, the full retirement age hasn't changed much over numerous decades. It sat at 66 years for persons born prior to 1955, and subsequently increased by two months for baby boomers born between 1955 and 1960. For any individual born in 1960 or later, their full retirement age is 67 years.
As of May 2022, the average retired worker was bringing home nearly $1,668/month, according to the Social Security Administration. If we arbitrarily make this the baseline figure, an early filing at age 62 by late-born boomers could permanently lower their monthly payout by around $500 a month. Conversely, waiting until age 70 could boost what late-born boomers take home by around $400 a month.
Understanding this table is vital to ensuring your financial well-being during retirement.
