There is arguably no program more important to the financial well-being of our nation's retired workforce than Social Security. The program, which began making payments to retired workers beginning in 1940, is counted on by 71% of unmarried elderly individuals and 48% of elderly married couples to contribute half of their monthly income. It's safe to say that without Social Security income, many seniors would struggle to meet their monthly expenses during retirement.
But the biggest decision seniors will make that'll impact their ability to meet those expenses is when to claim benefits.
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Your benefits claim has major repercussions
There are a number of factors that go into the formula that the Social Security Administration (SSA) uses to determine an individual's payout. The SSA takes into account your 35 highest-earning years, as well as your work history. Therefore, the more you earn per year, the more likely you are to maximize your monthly Social Security benefit. Similarly, working at least 35 years will give you the opportunity to boost your monthly payout, since $0s are averaged in for every year from that 35 that you did not work.
But it's your decision of when to file for benefits that can have the biggest impact of all on your monthly payout.
Your claiming decision revolves around when you'll reach your full retirement age, or FRA. Your FRA, put simply, is the age at which you're entitled to receive 100% of your monthly benefit. If you claim Social Security before reaching this age, your monthly benefits are reduced. If you wait to claim until after hitting your FRA, your payments can actually be higher than your FRA benefit. You can locate your full retirement age, which is based on your birth year, with this Social Security table.
In 2017, the full retirement age is 66 years and 2 months, which represents the first increase for brand-new retirees claiming at age 62 in 12 years. This means claiming between age 62 and 66 years and 1 month will lead to a reduction of up to 25.8% from your FRA benefit. Conversely, waiting until between age 66 years and 3 months and age 70, the last point at which Social Security benefits accrue, can increase your payout by up to 30.7% over what you'd have received at age 66 years and 2 months. On average, Social Security benefits grow by about 8% for each year that you hold off on claiming between ages 62 and 70.
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Here's how much the average retired worker receives in 20 years
Just how important is this claiming decision? Let's illustrate it by examining how much the average retired worker will receive in Social Security benefits over a 20-year period. Why 20 years? According to the SSA, an average man and woman reaching 65 years old today will live a respective 19.3 and 21.6 years, making 20 seem like a pretty fair choice.
Furthermore, we'll make the assumption that Social Security benefits will grow by an average of 2% per year over the next 20 years. Though Social Security's cost-of-living adjustments (COLA) have been higher in the past, in recent years this seems like a pretty accurate and fair assessment.
According to the December snapshot from the SSA, the average retired worker received $1,360.13 a month, which works out to $16,321.56 extrapolated over the course of a year. This will be the baseline figure we'll use for age 66 years and 2 months. By the 20th year, and following annual COLAs of 2%, the average retired worker would be receiving $23,777.43 each year. On a cumulative basis, the average retired worker is on track to receive $396,570.97 from Social Security over 20 years.
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But what happens if he or she claims at age 62, or waits until age 70? Let's have a look.
An individual claiming at age 62 in 2017, the earliest age possible, would have to be willing to accept a 25.8% reduction from their full retirement age benefit. Based on the SSA's average retired worker benefit of $1,360.13, a 25.8% reduction works out to $1,009.22 a month, or $12,110.60 a year. Now let's run the same calculations with a 2% COLA on this reduced lifetime payout. By the 20th year, with a 2% annual COLA, the age 62 retiree would be receiving $17,642.86 annually, with an aggregate lifetime payout of $294,255.72 over those 20 years. That's a more than $102,000 decline compared to claiming at the full retirement age.
A retired worker born in 1955 who waits until age 70 to file would receive a 30.7% increase to their payout compared to their FRA benefit. Based on the $1,360.13 monthly payout listed above, this works out to a monthly benefit check of $1,777.69, or $21,332.28 a year. By the 20th year, with a 2% annual COLA, the annual payout will have grown to $31,077.10, with an aggregate lifetime payout of $518,318.30. This represents almost a $122,000 improvement in lifetime benefits at full retirement age after 20 years, and it's more than a $224,000 improvement over claiming at age 62.
Here's a quick roundup of the differences in lifetime payouts based on claiming age, given the average retired worker monthly payout from December 2016:
Data source: Social Security Administration December snapshot. Chart and calculations by author.
Three variables that weren't factored in (that you should be aware of)
All things being equal, this data unequivocally demonstrates the importance of waiting to claim benefits for as long as is reasonable. However, this data doesn't tell the entire story.
One variable not factored into the above equation is that enrollees at age 62 get an eight-year head start on receiving benefits compared to those who begin claiming at age 70. If the life expectancies described by the SSA hold true, claimants at age 62 will have around 23 years to collect benefit checks, while those at age 70 will only have about 15 years. Mind you, the people who wait to age 70 will still receive more in lifetime benefits, but the gap won't be nearly as pronounced as in the ideal example above.
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Secondly, it's worth keeping in mind that not everyone will benefit by waiting to claim Social Security at age 66 or 70. Persons in poor health, or those who can't find a job or generate income, may benefit from claiming at an earlier age. In other words, even though the statistical data suggests that waiting is your best bet, everyone's unique financial needs and health outlook will dictate what decision is right for them.
Finally, this data glosses over the fact that Social Security's Trust is expected to exhaust its more than $2.8 trillion in spare cash by the year 2034, at least according to the Social Security Board of Trustees 2016 report. The Trustees have estimated that an across-the-board benefits cut of up to 21% may be needed to sustain Social Security through 2090 if Congress sits on its hands and fails to find a solution to fix Social Security. This possible cut in future benefits wasn't considered in any of the above calculations.
The big question you need to ask yourself is whether waiting makes sense for you.
