For a majority of the 41.2 million retired workers currently receiving a monthly Social Security check, their benefit comprises at least half of their monthly retirement income. Take away or lower that benefit, and quite a many senior citizens could struggle to make ends meet.
How your Social Security benefit is calculated
Your Social Security benefit is based on a confluence of factors. For example, your average annual earnings over your 35 highest-earning years helps to determine what you'll be paid monthly at your full retirement age. Your full retirement age, or FRA, is the age at which the Social Security Administration (SSA) doles out 100% of your monthly benefit. Claiming before or after your FRA can reduce or even increase your eventual monthly payout.
In addition to your average annual wages, the number of years you work matters. As noted above, the SSA will factor in your 35 highest-earning years. For each year fewer than 35 that you've earned wages, a $0 will be averaged in, thusly dragging down your eventual Social Security payout.
Arguably, though, the biggest decision you'll make during retirement is when to claim Social Security benefits. Generally speaking, your benefits increase by roughly 8% for each year that you hold off on enrolling, beginning at age 62. Claiming as soon as possible at age 62 could result in a 25% to 30% reduction in your monthly benefit from what you would have received at your full retirement age. Conversely, waiting until age 70, the last age at which benefits accrue, can net an individual up to a 24% to 32% increase in monthly payout over their full retirement age benefit. You can find your full retirement age by using this table from the SSA.
Real-world reasons to wait to claim Social Security benefits
It's worth pointing out that not everyone is best-suited to wait until age 70, or even their full retirement age, to claim Social Security benefits. For example, seniors in poor health, the wealthy who won't rely on Social Security income, and spouses with substantially lower lifetime earnings than their partners, generally benefit from filing early. But, many seniors could benefit from waiting to claim benefits, too.
The most granular reason to wait to claim Social Security benefits is simple: You'll have a bigger monthly payout during retirement. However, there are a handful of far more important reasons why waiting to enroll is a good idea, beyond this granular dogma. Let's take a look at three real-world examples of why waiting to claim Social Security benefits makes sense.
1. Americans are terrible savers
Americans have very poor saving habits. November 2016 data from the St. Louis Federal Reserve showed that the personal savings rate in the U.S. is a measly 5.5%. Comparatively, it was 11.7% in November 1966, and the citizens of most developed countries tends to save in the neighborhood of 10% of their income, if not more. Financial advisors recommend workers save (and invest) between 10% and 15% of their annual income.
The result is that most working Americans are ill-prepared for retirement. According to a 2015 telephone survey from the Employee Benefit Research Institute, just 22% of workers were "very confident" that they would have enough money in retirement compared to 64% who believed they were behind where they should be in their savings.
The initial knee-jerk reaction to having inadequate savings might be to file for Social Security benefits as soon as possible, but this is almost always the worst possible course of action. If you have insufficient retirement savings, you'll probably be leaning heavily on Social Security income during retirement. Claiming early would mean accepting a 25% to 30% permanent reduction in monthly benefits from your FRA benefit.
The preferred course of action if you have little or nothing saved for retirement is to work as long as possible, assuming you're in good health, and hold off on claiming Social Security benefits until at, or after, your full retirement age. This way you'll net the biggest payments possible during retirement, even if your nest egg dwindles quickly.
2. Life expectancies are increasing at a pretty steady pace
A second good reason you should strongly consider claiming your Social Security benefits at or after your FRA is the steady improvement in life expectancies.
Since the mid-1960s, life expectancies have increased by approximately nine years -- to almost 79 years old. This is a result of improved access to medicine, new and innovative types of pharmaceutical products, and improved health and wellness knowledge for consumers and physicians. As medicines and medical knowledge improves, the expectation is that Americans will continue to live longer, healthier lives.
However, living longer is somewhat of a double-edged sword for Americans who, as noted above, have very poor saving habits. It means they'll need to make what they've saved last even longer. One of the best and smartest ways for seniors to make their retirement dollars stretch is by waiting longer to claim Social Security benefits. The decision to claim early and permanently reduce your take-home becomes magnified as life expectancies rise.
3. Social Security changes may be inevitable
Finally, claiming later could be a smart strategy considering that change to the program is probably inevitable.
According to the Social Security Board of Trustees 2016 report, the Trust's more than $2.8 trillion in spare cash is expected to be depleted by the year 2034. If Congress fails to act and the Trust exhausts its spare cash, an across-the-board benefits cut of up to 21% may be needed to preserve payments to beneficiaries through the year 2090.
On one hand, an argument could be made that claiming benefits as soon as possible could be beneficial. In other words, the idea is that seniors should take advantage of the current benefit structure for at least the next 17 years before the cuts kick in. However, there's another side to this coin. If you take a reduction by claiming early now, or at any point over the next 17 years, and Congress fails to come up with an amicable solution to fix Social Security's budgetary shortfall, then your permanently reduced benefit will face an even steeper haircut by 2034. If, however, you wait longer to claim Social Security benefits, an up to 21% reduction could still leave you with a relatively healthy monthly benefit.
What's more, if Congress does decide to enact changes to Social Security, it's not out of the question that the changes could include increases to revenue as well as benefit cuts. One of the more popular solutions to cutting benefits is to increase the full retirement age to 68, 69, or 70. Right now the full retirement age is slated to stop rising in 2022 when it reaches 67. Raising the FRA reduces the payouts for all future retirees unless they choose to wait longer to claim benefits.
Adjusting your mindset to that of someone who plans to wait to claim Social Security benefits is a great way to anticipate future changes in the program, as well as mediate increasing life expectancies and potentially poor saving habits.