Seniors have a number of major decisions to make during their golden years, but none may be more important than when to claim Social Security benefits.
Your claiming age plays a big role in determining what you're paid monthly
According to the Social Security Administration (SSA), the data is very clear: Retired workers depend heavily on their benefits to help cover their monthly expenses. A little over 60% of all retired workers and 71% of all unmarried elderly retired workers count on their benefits for at least half of their monthly retirement income.
One of the biggest contributing factors to what you'll be paid once you do decide to claim Social Security is your claiming age. Sure, your 35 highest-earning years, and therefore your work history, will play a role in determining your full retirement age benefit (your full retirement age is the point at which the SSA deems you eligible to receive 100% of your monthly payout). But when you decide to file for benefits can arguably have an even bigger impact.
Seniors can begin taking Social Security as early as age 62 or at any age thereafter. However, the SSA offers quite the incentive to wait. For each year a person hold off on claiming benefits, their eventual payout will grow by about 8%. This means if you waited all the way until age 70, the age at which benefits stop accruing, your monthly payout could be up to 76% higher than if you signed up for Social Security at age 62.
However, everything is determined first and foremost by your full retirement age. For those born in 1955 (i.e., this year's newest retirees eligible for Social Security benefits), your FRA is 66 years and two months. If you were to file for Social Security benefits at any point between age 62 and the month before your personal FRA, you'd be accepting a permanent reduction in your monthly payout that could be as high as 25% to 30%. Conversely, if you claimed benefits at any point between a month after your personal FRA and age 70, your monthly payout could be 24% to 32% higher than what you'd have received at your FRA
An illustration of what the average American would be paid by claiming Social Security at age 62
The system very clearly incentivizes seniors to wait, but that's not often what happens. Data from the Centers for Retirement Research at Boston College has shown that three in five seniors claim Social Security benefits before hitting their FRA, with age 62 being the most popular of all ages. As of 2013, 42% of men and 48% of women claimed Social Security at age 62.
However, for those born in 1955, claiming at age 62 means accepting a 25.8% permanent reduction in your monthly payment relative to what you'd receive had you waited till age 66 years and two months, the FRA for someone born in 1955.
What might this payout look like over time? Let's take a look at what the average American claiming at age 62 and born in 1955 would receive in lifetime benefits. For our example, we'll use the average monthly retired worker payout of $1,363.66, per the February 2017 snapshot from the SSA, as our full retirement age baseline, and we'll also assume that the average benefit increased annually by 2%. Cost-of-living adjustments have averaged around 2% over the past two decades, so this seems like a fair real-world estimate.
As you can see above, the advantage of claiming at age 62 is that you'll begin receiving income immediately. The downside, of course, is that your payout will be reduced substantially compared to those who patiently wait to claim later.
By age 79, which is roughly the average life expectancy in the U.S., the average American born in 1955 and claiming at age 62 would have netted almost $260,000 in lifetime benefits. If he or she makes it to age 90, they'll have collected more than $471,000 in lifetime Social Security benefits. By comparison, if they had waited to claim until age 65, they would have been paid over $29,000 more in lifetime benefits by age 90 relative to the age 62 claimant.
Claiming at age 62 makes sense in these instances
Despite giving up at least 25% per month of what they'd have received by waiting till they reached their FRA, some seniors probably have a very good reason for claiming benefits at age 62. Here are a handful of reasons when claiming at age 62 makes sense.
- If your health is an issue: Though none of us knows our expiration date with any certainty, we can use our personal and family health history to somewhat predict how long we'll live. If you expect to live to your 80s and beyond, waiting to claim is often the smarter move. But if your health isn't great, claiming early and netting that guaranteed income may be a wiser way to go.
- If you're wealthy: If Social Security income is just icing on the cake and you won't at all be dependent on it, claiming early, so long as the added income doesn't bump you into an even higher tax bracket, may make sense.
- If you can't generate income or find work: If you're struggling to find work and need income to pay your bills, claiming benefits early may make sense. Plus, Form SSA-521 acts as a mulligan for the first 12 months, allowing you to undo your claim if you do find work, so long as you repay every cent in benefits received from the SSA.
- If you're the lower-earning spouse: It generally also makes sense for a lower-earning spouse to claim Social Security benefits early. A lower-earning spouse won't see as big of an increase in their payout by waiting as the spouse who had a higher income during their lifetime. However, the household probably needs to generate some income while the higher-earning spouse allows his or her benefit to grow. Having the lower-earning spouse claim early generates income for the household while allowing the higher-income benefit to really pack a punch later in life.
And the one time you absolutely shouldn't consider claiming at age 62 is if you have little or nothing saved for retirement. Claiming early and generating income might seem tempting, but permanently reducing your payout if you're going to have to rely heavily on Social Security income isn't a smart move.
Your claiming decision is a personal one, but this breakdown should hopefully make it that much easier.