Social Security is a pivotal source of income for seniors when they eventually hang their work gloves up for good.
National pollster Gallup found in a 2015 poll of current retirees that 59% rely on Social Security to be a "major" part of their monthly income, with another 31% counting it as a "minor" source of monthly income. Suffice it to say that without Social Security, many seniors would be struggling to pay their bills.
But Social Security is itself not in the best of shape. Two demographic shifts -- the retirement of baby boomers and the rapid expansion of life expectancies over the past five decades -- have put added pressure on the Social Security program. Based on the most recent report from the Social Security Board of Trustees, the program is expected to have completely burned through its $2.8 trillion in spare cash by the year 2034. Assuming Congress does nothing, this could necessitate an across-the-board benefits cut of up to 21%.
The toughest question: claim now or later?
This leaves pre-retirees in a bit of a pickle. Should they claim as early as possible to ensure they receive 18 additional years of benefits without enduring a possible cut, or do they take their chances and wait, allowing their benefit to grow?
The answer for many is to claim benefits early -- although the reasoning may or may not have to do with the impending budgetary shortfalls of the program. Based on data from the Social Security Administration that was aggregated by the Center for Retirement Research at Boston College in 2013, approximately 45% of seniors file for Social Security as early as possible, age 62. All told, about three in five sign up before hitting their full retirement age (FRA).
A person's FRA is determined by their birth year, ranging from 66 to 67 for those who are currently of working age, and it marks the point at which an individual is entitled to 100% of their benefits as determined by SSA calculations. If you file for benefits before hitting your FRA, your monthly payout will be less. . For those filing immediately at age 62, it could be as much as 25% to 30% less than they would receive at their FRA, depending on their birth year.
Conversely, waiting to file until after your FRA can boost your payout. How much more you'll get depends on your FRA. If you were born between 1943 and 1954 and wait to file until age 70, your monthly benefit check would be equal to 132% of your FRA. For those of you born in 1960 or later, your FRA is 67. Since benefits grow at a rate of 8% per year between ages 62 and 70, this would work out to a maximum payment of 124% of your FRA benefit. Persons born between 1955 and 1959 will see changes in their FRA benefit in two-month increments, as you can see in this SSA table. Based on the year you were born, your maximum payout will be higher than 124% of your FRA benefit, but less than 132%.
Here's how big your benefit would be if you wait until age 70
How much does waiting until age 70 translate to in actual dollars? That's an answer that's going to be different for everyone because it not only depends on their birth year but also on their work history. People who earned more during their lifetime are probably going to have higher payments than those who earned less.
However, we do have data from the Social Security Administration in 2014 that spells out what the average monthly Social Security check is by age. Here's a quick rundown of what persons between the ages of 62 and 70 were netting on a monthly basis as of two years ago:
- Age 62: $1,061.41
- Age 63: $1,082.43
- Age 64: $1,104.33
- Age 65: $1,169.73
- Age 66: $1,356.30
- Age 67: $1,371.93
- Age 68: $1,404.10
- Age 69: $1,385.84
- Age 70: $1,417.29
Two things are worth noting here. First, keep in mind that this data published in 2015 by the SSA is from 2014. Though there was no cost-of-living adjustment (COLA) handed out in 2016, there was a 1.7% COLA divvied out in 2015 that has since boosted these figures.
Second, we should also take into account that the lower average payouts of the majority of seniors who claimed benefits prior to hitting their FRA are dragging down the average benefit payout for persons between ages 67 and 70.
If we were to use the age 62 average payout of $1,061.41 as our baseline, with the assumption that individuals filing for benefits at age 62 would receive a 25% reduction from their FRA benefit, then the average FRA benefit would have been $1,415.21. Assuming that seniors born between 1943 and 1954 hold off until age 70 to claim benefits, this would result in a monthly benefit at age 70 of $1,868.08 (132% of $1,415.21). That's an improvement of more than $800 per month -- or close to $9,700 a year -- by waiting until age 70 to file, at least based on the data provided by the SSA.
When waiting makes sense
More money sounds like a great proposition, and it certainly makes sense for some seniors. In particular, there are three situations where waiting until age 70 is a smart move.
First of all, if you're in excellent health and your family history suggests that you'll live a long life, waiting until age 70 to file could be the best move for you. We obviously don't have a crystal ball that allows us to know our expiration date ahead of time, but the key inflection point that retirees should have in focus is age 78. Age 78 is the point at which someone claiming benefits at age 62 and someone claiming benefits at age 70 will have netted an equal amount in benefits from Social Security. If you believe you'll live longer than age 78, then waiting to sign up will maximize your lifetime benefits received from the program.
Second, if you have little or nothing in retirement savings, waiting as long as possible is the best option for you. In a perfect scenario, someone with little saved for retirement will be healthy enough to work throughout their 60s, relying on their wages to meet their month-to-month expenses and perhaps being able to save some additional money toward their retirement. Waiting is critical for those with little savings, since Social Security is liable to be your primary -- if not only -- source of income during retirement. Filing early would lock you into a reduced payment for the remainder of your life.
Lastly, higher-earning spouses would be wise to wait until age 70 to file for benefits. For starters, if the lower-income spouse outlives the higher-income spouse, then waiting until age 70 could net the lower-income spouse a higher survivor benefit. Additionally, for situations with a large difference in lifetime earning history, it often makes sense for a lower-income spouse to file for benefits early in order to generate some household income, while the higher-earning spouse waits until age 70 and allows their benefit to increase to 124% to 132% of the FRA benefit. Having the higher-income spouse wait packs a bigger punch for the couple.
Waiting until age 70 may not be appropriate for everyone, but it could be a good way to give yourself a raise during retirement.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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