This article was updated on April 5, 2017, and was originally published on November 28, 2016.
As of February 2017, more than 61 million people were receiving a monthly benefit check from the Social Security Administration (SSA). Of these 61 million-plus individuals, two-thirds are retired workers, and without Social Security income, many would probably be living in poverty, or having difficulty paying their bills during retirement.
Social Security income itself depends on a number of key factors. One of those factors is how long you worked. The SSA takes into account your 35 highest-earning years when calculating your monthly benefit amount. If you didn't work a total of 35 years, the IRS will attribute $0 income for each of those years, and that will get averaged in when determining the income you'll receive.
Your annual income obviously matters, too. The higher your wages throughout your lifetime, the better chance you'll have of maxing out your Social Security benefit. For context, the maximum monthly benefit in 2017 is $2,687 a month, although this figure is fluid on a year-to-year basis based on the inflation rate.
When you enroll makes a big difference
One of the biggest factors under your control is when you sign up for Social Security benefits. Based on when you enroll, your Social Security benefit could be reduced by up to 30% compared with what you would have received if you'd waited until your full retirement age, or if you wait, it could grow by an additional 32% over what you would have had at your full retirement age.
A person's full retirement age, or FRA, is the point at which the SSA deems that you've earned 100% of your primary insurance amount -- more commonly referred to as your benefit. It's a dynamic number that changes based on your birth year. As you can see from this SSA table, the FRA began rising in 2017 for brand-new retirees -- those born in 1955 or later -- which somewhat reflects the lengthening of life expectancies. Social Security benefits grow by about 8% each year that you hold off on enrolling, beginning at age 62 and ending at age 70.
For example, someone born in 1954 has an FRA of 66 years. That means people born in 1954 would have to wait until they turn 66 before they could receive 100% of their Social Security benefits. If they filed for benefits at any point between age 62 and age 65 and 11 months, they would receive a reduced benefit. Likewise, if they held off on signing up, their benefit would grow beyond 100% to as much as 132% at any point between 66 years and 1 month until age 70.
Social Security benefits stop increasing in value at age 70. The preceding chart for seniors born between 1943 and 1954 illustrates this trade-off of claiming early versus waiting.
Why a majority of seniors file early for benefits
According to data aggregated by the Centers for Retirement Research at Boston College, about 60% of all seniors claim Social Security benefits before reaching their FRA, nearly a third do so during the year they'll reach their FRA, and about 10% do so after reaching their FRA.
Why would so many seniors file for benefits and take a reduction to the payment they'd receive if they waited until their FRA? Based on the findings of the Nationwide Retirement Institute Consumer Social Security Study, released in June 2016, these are the most common reasons seniors -- both new and longtime retirees -- claimed Social Security benefits earlier than their FRA.
- To pay living expenses: 51%.
- To supplement income: 46%.
- Retired earlier than expected: 27%.
- No other income: 18%.
- Laid off or unemployed: 17%.
- Developed health problems: 15%.
Some of these reasons make perfect sense. For instance, developing health problems or having a reduced life expectancy because of a chronic disease or condition is often a valid reason to take Social Security benefits sooner rather than later. In many instances, age 78 tends to be an inflection point where the cumulative benefits accrued from waiting until age 70 and filing for benefits match the aggregate benefits received by filing at age 62. Though none of us has a crystal ball that'll tell us our expiration date, if you don't believe you'll live beyond age 78, then filing for benefits earlier is usually the smarter option.
If you've been unemployed for the long term or health problems keep you from working, then filing early can also make a lot of sense, given that you'll need some sort of income to survive. One of the lesser-known but helpful aspects of Social Security is that it has a built in "do-over" clause in case you do find a good job shortly after filing early for benefits. As long as you do so within the first 12 months of receiving benefits (note the added emphasis), Form SSA 521 will allow you to withdraw your claim as long as you pay every cent you've received back to the SSA. This allows your benefits to continue growing as if you never signed up in the first place.
Some reasons for filing early are ill-conceived
However, not all reasons for filing early make as much sense. For example, it's a bit worrisome that seniors with "no other income" are choosing to retire early and take a reduction in benefits of up to 30%. Remember, with the exception of Form SSA 521, if you file for benefits early, you'll be stuck with a reduced benefit for the remainder of your life.
According to the National Retirement Institute's data, about 11% of new retirees filed early because they had no other income. On one hand, if there's a health problem that's keeping a person from working then filing early would make sense. However, being an otherwise healthy individual with no income or very little in savings is a great reason to get a job and hold off on filing for Social Security benefits to maximize them by age 70. Working past the traditional retirement age should allow seniors to use their wages to cover their month-to-month expenses while allowing their eventual Social Security benefit to grow. If you plan to lean heavily on Social Security income during retirement, you might as well wait until your FRA or after to get as big a monthly paycheck as possible.
Seeing that 46% of seniors filed early to supplement their income is also a bit worrisome. Supplementing your income if you have a solid foundation built up via retirement accounts may not be a bad idea. However, attempting to supplement your income while working before reaching your FRA could leave you disappointed.
The SSA has thresholds that define how much a senior between age 62 and his or her FRA can earn each year before benefits are reduced. In 2017, $1 in benefits can be withheld for each $2 in earnings above $16,920 for people aged 62 to 65 who have filed for Social Security income. For those expected to reach their FRA in 2017 but who have yet to do so, $1 in benefits can be withheld for every $3 in earnings beyond $44,880.
Now here's the good news: Withheld benefits aren't lost benefits. You'll get them back after hitting your FRA in the form of a higher monthly benefit. But if you were counting on Social Security income to pad your pockets between age 62 and your FRA, you may be disappointed if you earn above these thresholds.