There's little denying the importance that Social Security plays for our nation's retired workers. According to statistics from the Social Security Administration (SSA) that were released last year, a little more than three in five retired workers relies on their Social Security benefits to make up at least half of their monthly income. Without the monthly income Social Security provides, many seniors would probably be living at or below the poverty rate.
You control your own destiny
However, you ultimately hold the golden ticket that determines how much Social Security will pay you once you file your claim for benefits. There are a number of factors that go into determining how large your monthly check will be.
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For instance, your work history matters. The SSA averages in your 35 top-earning years when determining your benefit. If you've worked fewer than 35 years in your life, a zero ($0) is averaged in for each year less of 35.
Your earnings history is obviously important, too. Though there are monthly caps on what the SSA will pay a beneficiary during retirement (in 2017 the cap is $2,687 a month), the more you earn each year, the more likely you are to increase your retirement benefit from the SSA.
Arguably, though, the biggest decision you'll make in your life is deciding when to claim Social Security benefits. Qualifying retired workers have the option of claiming Social Security as early as age 62, or at any age thereafter. But the key figure that's of the utmost importance in the claiming process is your full retirement age.
The importance of your full retirement age
Your full retirement age is the age at which the SSA deems you eligible to receive 100% of your monthly benefits, and it's determined by your birth year (the SSA has a handy table to help you find your full retirement age). If you claim Social Security benefits before hitting your full retirement age, you'll accept a permanent reduction to your monthly Social Security check. If you wait until after your full retirement age to claim benefits, you get an even larger monthly check. Each year that you hold off on claiming benefits, beginning at age 62, your eventual benefit grows by approximately 8%. This annual accrual ends at age 70. While you aren't forced to claim Social Security by age 70, there's no longer any added incentive to wait.
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Essentially this is the conundrum that every senior will eventually face: Should you claim Social Security benefits early to start receiving extra cash each month, or should you hold off and wait for a bigger payout in your late 60s or perhaps even until age 70?
An illustration of what the average American will be paid by Social Security
Today, we'll take a closer look at a chart that'll illustrate these differences.
To do that, we'll need the current monthly payout for a retired worker as of February 2017, which was $1,363.66, according to the SSA's monthly snapshot. We'll be using this average monthly payout as our baseline full retirement age payout, and then examining what a 62-year-old today, born in 1955, would earn in lifetime benefits if he or she decided to claim at any age between 62 and 70. We'll run this fictitious simulation through age 85, since most retirees are living two decades, if not longer, these days. Finally, we'll factor in a cost-of-living adjustment (COLA) of 2% each year, which is fairly reflective of what COLAs have been over the past two decades.
Here's what this looks like as a chart:
Data source: Social Security Administration, authors calculations based on a 2% COLA per year. Full retirement age of 66 years and 2 months used for persons born in 1955. Chart by author.
As you can see, there's some pretty significant crossover that begins around 2034 through 2037. What this implies is that persons who claim early are, somewhere around their 78th to 81st year of age, being passed in lifetime benefits by those who've chosen to wait longer to claim benefits. For instance, an individual who claims Social Security at age 62 has, by age 85, earned approximately $28,200 less than an individual born in 1955 who waited until his or her full retirement age at 66 years and two months.
What this chart suggests
This illustration serves an important purpose for seniors, pre-retirees, and working Americans. It demonstrates the magnitude of your claiming decision.
On one hand, waiting longer will obviously lead to a larger monthly payment. However, that assumes you live to see your 85th birthday, which for all of us is more of a guessing game. When deciding whether you should claim earlier or later, you'll need to take some critical and personal factors into account, including your health, your savings, and whether or not you're taking care of anyone else financially.
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Generally speaking, people in poor health, those who are buried under debt, spouses with substantially lower income than their partner, and people who can't get a job or generate income are best off filing for Social Security benefits earlier rather than later. Plus, a "mulligan" of sorts exists (Form SSA-521) that allows seniors to undo their claiming decision within the first 12 months of filing for benefits should they suddenly land a job or regret their early claiming decision.
Conversely, higher-earning spouses, people with little to nothing saved for retirement, and healthier individuals are often best off waiting until their full retirement age or later to claim Social Security.
It's a personal decision for everyone, but this should help make it that much easier.
