Social Security is a program that forms the financial foundation for a majority of our nation's retired workers, and that's not expected to change anytime soon.
We're really dependent on Social Security income, and that could be a problem
Data from the Social Security Administration (SSA) shows that 61% of all current retired workers receiving benefits count on Social Security to provide at least half of their monthly income.
A separate survey of baby boomers who are readying to retire found a similar reliance on the program. According to the Insured Retirement Institute's "Boomer Expectations for Retirement 2016" report, 59% of boomers anticipate leaning on Social Security for at least half of their monthly income. The SSA suggests that Social Security should only replace about 40% of a retired worker's annual income.
If Social Security were in great shape, relying on the program to supply such a large proportion of retirees' monthly retirement income probably wouldn't be a major concern. But the reality is Social Security isn't in good shape, and the program that seniors rely on is nearing a point where its foundation will begin cracking.
According to the Social Security Board of Trustees 2016 report, Social Security's Trust will begin paying out more cash than it's bringing in from payroll taxes, interest, and the taxation of benefits by 2020, culminating in the program's extra cash being completely exhausted by 2034. Should this excess cash disappear, the Trustees estimate that an across-the-board benefits cut of up to 21% may be needed to sustain payouts to the year 2090. With so many seniors reliant on Social Security, a 21% haircut would be a major problem.
The importance of when you claim Social Security
On one hand, Congress needs to make changes to the program that will benefit current and future retirees as much as possible. But waiting on Congress to act isn't a sound retirement plan. Another critical action that'll determine how much you'll receive once you sign up for Social Security benefits is your claiming age.
Three things factor into your monthly Social Security benefit, of which two are interconnected (your annual earnings and work history). The SSA will average out your 35 highest-income years of work when calculating your benefit, and average in a zero for each year less than 35 that you worked. Therefore it's in your best interests to work at least 35 years and earn as much as you can annually when you work in order to maximize your eventual benefit payment.
The other component is your claiming age. Seniors can begin receiving Social Security as early as age 62 and at any point/age thereafter. However, the SSA incentivizes patience. For each year that you wait between age 62 and age 70, your monthly Social Security payout grows by about 8%, meaning there could be up to a 76% difference in monthly payment between claiming benefits at age 62 and age 70.
The key component you'll need to know when claiming Social Security benefits is your full retirement age, or FRA. Your FRA is the point at which the SSA deems you eligible to receive 100% of your monthly benefits. For those born in 1955 (i.e., this year's newest eligible retirees), the FRA is 66 years and two months. Claim at any point before hitting 66 years and two months and your payout will be permanently reduced for life by up to 25% to 30%. Hold off and wait until after your FRA, and your payout could be up to 24% to 32% larger than what it would have been at your FRA.
If you're curious what your unique full retirement age is, this handy table from the SSA should help.
The shocking number of seniors who claim at age 70
Based on these fairly simple claiming dynamics, waiting longer means a bigger payout. One would think that a decent number of retirees would do exactly that in order to maximize what they receive each month once they retire -- but that's far from the case.
Data from the Centers for Retirement Research at Boston College examined the claiming decision of seniors in 2013 and found that a vast majority of them wind up taking benefits before they hit their full retirement age. About 3 in 5 seniors enroll for Social Security benefits between ages 62 and 64. Another roughly 30% tend to enroll at their FRA, which the Centers for Retirement Research pegged as either age 65 or 66. This means that just 10% of all seniors are waiting to file for benefits after their full retirement age.
So how many are actually maximizing their payouts by waiting until age 70? How about just 3% of all seniors (2% of men and 4% of women). That's a shockingly low number, and it means that most seniors are probably accepting a permanent reduction to their monthly payouts based on their claiming age. That's not going to be a good thing if Social Security benefits are cut in 2034.
When does claiming at age 70 make sense?
Though waiting until age 70 and maximizing your payout seems great on paper, it won't always make sense for every senior. After all, your claiming decision is personal and often influenced by a number of factors including your health, your income, your savings, and whether or not you're taking care of someone else or have a spouse.
For instance, persons in poor health, those who can't find a job or generate income, the wealthy who won't be reliant on Social Security income, and persons with substantially lower lifetime income than their spouse often benefit from enrolling in Social Security earlier rather than later.
But there's a flipside to this.
For starters, a higher-earning spouse is best off waiting as long as possible to claim benefits. A higher-earning spouse who waits to claim will see a larger dollar increase in their monthly payout than they would if the lower-earning spouse holds off, thus it'll create a bigger boost in later-in-life income for the couple.
Seniors who are in good or excellent health should also consider waiting to file for benefits. Life expectancies have increased by nearly nine years over the past five decades, and while our expiration date is nothing more than a guess, waiting to claim benefits until age 70 if you're in good or excellent health can be that much more helpful in ensuring that you don't outlive your nest egg.
Finally, seniors entering retirement with little or nothing saved would be wise to wait as long as possible (preferably age 70) before claiming Social Security. If you have little or nothing saved, then you're probably going to be reliant on Social Security income for the remainder of your life. It might be tempting to enroll early and get an immediate boost in your income, but that's actually a terrible idea because it'll mean a permanent reduction in your monthly payouts. With a possible benefits cut less than two decades away, that's not a good idea. Instead, the smart move for those with poor savings habits is to work a bit longer, try to save a bit more of what they earn, and claim Social Security at age 70 to maximize their payout.