For a large swath of seniors, Social Security plays, or is expected to play, an important role during their retirement. The latest survey from national pollster Gallup finds that nearly 60% of all seniors rely on Social Security to be a "major" part of their monthly income, while 87% of all current retirees are reliant on Social Security to help meet their monthly expenses to some varying degree.
With Social Security having such a vital role in providing a financial foundation for America's retirees, it only makes sense to head into retirement prepared. Yet, far too many seniors enter retirement without an adequate understanding of the program that could help financially support them during their golden years.
Six questions to ask before taking Social Security benefits
If you're eligible for Social Security and have yet to take benefits or you're nearing eligibility in the next few months or years, here are six questions you should be asking before you consider taking benefits.
1. What's my full retirement age?
The starting point for anyone looking to make an informed decision on when to file for Social Security benefits begins with understanding his or her full retirement age, or FRA. Put simply, your FRA is the age at which the Social Security Administration (SSA) deems you eligible to receive 100% of your primary insurance amount (PIA). Remember, your PIA is calculated based on the average annual income over your 35 highest-earning years.
Now here's the thing with the full retirement age: It differs based on your birth year. People born between 1943 and 1954 have had a consistent FRA of 66 years. However, beginning in 2017 and continuing until 2022, the FRA is going to rise by two months each year, ultimately reaching 67 years of age by 2022. You can find your full retirement age in this SSA table.
2. How will the age I take benefits affect my eventual monthly payout?
Once you know your full retirement age, the next step is to understand the trade-off between filing for benefits as early as possible (age 62) and waiting to file all the way until age 70.
Filing early means receiving benefits for a longer amount of time than those who choose to wait (assuming a similar life expectancy), but it also comes with the trade-off of a lower payout. Taking benefits at any point before you reach your full retirement age could mean a reduction of up to 25% to 30% in your monthly benefit from what you would have received had you waited until your FRA. However, for each month that you wait, your benefit increases. Even postponing your claim one, three, or six months can have a positive impact on your eventual payout.
On average, benefits increase by around 8% for every year that you wait, with those increases stopping once you reach age 70. If you claim benefits after hitting our FRA, your monthly payout could actually be as much as 24% to 32% higher than what you would have received at your full retirement age.
3. Am I healthy?
The next consideration to be made is whether you're in good health and expect to live a longer than average life. For context, the average life expectancy in the U.S. is nearly 79 years, and it's risen nine years since the mid-1960s.
If you aren't in the best of health, then taking benefits sooner to realize the advantage of extra income is probably in your best interests. If you're an otherwise healthy individual with a family history of longevity, then it could be worthwhile to allow your benefits to grow by waiting to file. Right around age 78 tends to be the inflection point at which the lifetime benefits of a retiree who filed at age 62 and a retiree who filed at age 70, with similar income, have received a relatively equal cumulative payout. If you expect to make it well past age 78, waiting until your FRA or later is often going to net you the most from the program.
4. Do I have a spouse to consider?
You'll also want to coordinate your claiming decisions with your spouse, should you have one. For example, married couples where one partner has a considerably higher lifetime income than the other can work together to get the most out of their Social Security benefits. In order to generate some income during the early years of retirement, the lower-earning spouse can file for benefits. Meanwhile, the higher-earning spouse can allow their benefit to grow, since an extra 8% per year on a larger benefit will have a bigger impact on the cumulative benefit for the couple during retirement than if the lower-earning spouse had waited.
Furthermore, your claiming decision could impact the survivor or spousal benefit your partner receives. We'll discuss this a bit more below.
5. Is my earnings history correct?
Here's the good news: Mistakes to your earnings history, which is used to calculate your benefit, aren't too common. The bad news is the chance of an earnings mistake does exist, and it's enough to merit you closely examining your wage history before you begin taking Social Security benefits.
The thing is, the SSA only gives you a little more than three years to fix earnings history discrepancies, should you find any. There are a few exceptions to the aforementioned time limit, such as to correct fraud, or a clerical error made by the SSA itself, for example.
Now, back to the good news: You can check your earnings history with ease by creating a My Social Security account online. In addition to being able to check your earnings history, you'll also be able to estimate your future benefits, change your address, and start or stop direct depositing of benefits with a My Social Security account.
6. Am I eligible for additional benefits beyond those based on my own work history?
Finally, find out if there are alternative pathways to a higher Social Security benefit available. This is particularly helpful to spouses who've had a shorter career because they've taken care of their kids or acted as a caregiver to a friend or parent.
For instance, if you're married or you were married for at least 10 years before getting divorced, you may be eligible to receive up to 50% of your spouse's benefits based on their earnings history. This is especially helpful if you're the lower-earning spouse and the spousal benefit would be higher than your own benefit based on your work history. Spousal benefits are based on the monthly payout of when the higher-earning spouse or ex-spouse files for benefits. Thus, as noted in point four above, when you start benefits (before or after your FRA) can have far-reaching implications beyond just what you'll personally be paid.
Also, the surviving spouse (and ex-spouse for marriages lasting at least 10 years) benefit in instances where the breadwinning spouse passes away first can be up to 100% of the benefit received by the higher-earning spouse. In other words, lower-earning beneficiaries may have alternate claiming options that boost their income in retirement.
Once these six questions are answered, you should have all the knowledge and understanding you need to make an informed Social Security claiming decision.
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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