According to the March snapshot from the Social Security Administration (SSA), more than 61 million people were receiving a monthly benefit check from the Old-Age, Survivors, and Disability Insurance Trust. Two-thirds of those recipients were retired workers. SSA data shows that 61% of these recipients counts on their benefits for at least half of their monthly income. If there's one statistic that encapsulates the importance of Social Security for seniors, this figure is it.
Yet the program that's so critical to the financial well-being of seniors could soon fail them. The 2016 report from the Social Security Board of Trustees estimates that the Trust's more than $2.8 trillion in excess cash will be completely exhausted by the year 2034, at which point benefits could be cut across the board by as much as 21%. A potentially budget-neutral Social Security program is a scary outlook for working Americans and seniors alike.
You control these aspects of your Social Security benefit
Social Security's somewhat uncertain future is what makes the factors we can control all the more important. There are three factors, in particular, that can have a pretty substantive bearing on what we're eventually paid by the SSA on a monthly basis.
Two of the three things that are within our control are somewhat related: our earnings history and our length of work history. The SSA averages a person's 35 highest-earning years when calculating their monthly retirement benefit. This means (1) you'll want to earn as much as possible for each year that you do work, and (2) that you'll want to work at least 35 years to maximize what you can earn from Social Security. Each year worked below 35 will allow the SSA to average in a $0, which will drag down your eventual benefit.
However, the third factor could arguably be the most important: when you file for benefits.
The SSA allows seniors to begin collecting benefits as soon as they turn 62 or at any age thereafter, although there's a pretty big incentive to wait to file. For each year that you hold off on enrolling for Social Security, your benefit grows by roughly 8%. This means someone claiming at age 70, the last age at which benefits accrue at 8%, could net a 76% higher monthly payment than someone taking benefits as early as possible at age 62.
What you'll be paid is really a function of your earnings history, work history, and claiming date relative to your full retirement age (FRA). Your FRA is the age at which the SSA deems you eligible to receive 100% of your benefits, and it's determined by your birth year.
In easy-to-understand terms, if you file a claim before reaching your FRA, you'll accept a lifetime reduction in your monthly payments. If you file a claim after your FRA, your monthly check will be even larger than what it was at your FRA. For instance, claiming at age 62 could result in a 25% to 30% payment reduction, depending on your birth year, while claiming at age 70 could lead to a 24% to 32% larger monthly check, also depending on your birth year.
Today's newest eligible retirees born in 1955 have an FRA of 66 years and two months.
An illustration of what the average American would be paid by claiming at age 67
When do most seniors claim benefits, you wonder? According to data from the Center for Retirement Research at Boston College in 2013, 60% sign up between ages 62 and 64 and another 30% do so at their respective FRAs, which it estimates to be ages 65 or 66. This leaves just 10% to claim benefits between ages 67 and 70.
However, we are beginning to see a small but discernible shift toward later enrollment. One enrollment time frame that's gaining in popularity is age 67, which is the FRA for anyone born in 1960 or later. With saving habits being poor for many Americans, their reliance on Social Security income for retirement is growing. Waiting until age 67 ensures at least a 100% benefit payout for those born in 1960 or later, and an added bonus for those born earlier.
What might this look like over time? Let's have a look at what the average American claiming at age 67 and born in 1955 would be expected to receive in lifetime Social Security benefits. For our example, we'll use the average retired worker monthly benefit of $1,365.35 from the March snapshot as our FRA baseline, and assume a 2% annual cost-of-living adjustment (COLA). Why 2%? This has been the approximate average increase over the past two decades.
As you can see, waiting has its advantages, especially if you live well past the average life expectancy of 78.8 years, according to the Centers for Disease Control and Prevention. The downside being that you'll have to sit on your hands for five full years after you become eligible for benefits.
By age 79, which is close to the average life expectancy in America, you'd have received almost $257,000 in lifetime benefits. That's quite the tidy sum. Comparatively, if you live until age 90, you'd have walked away with nearly $532,000 in lifetime benefits. This is a clean $60,000 more at age 90 than a similar example of a person born in 1955 claiming at age 62.
Instances where claiming at age 67 makes sense
Why would someone choose to file for benefits at age 67?
One of the smartest reasons to do so, especially if you were born in 1960 or later, is that you won't have to take a reduction in benefits. Waiting until age 67 ensures that you'll receive at least your full benefit, based on your work and earnings history. Of course, you'll also want to make sure you have the income necessary to wait until age 67, which could mean working a few extra years, or perhaps relying on retirement income between an earlier retirement date and age 67.
If you're a healthy individual, claiming later rather than earlier tends to make sense. To be honest, none of us knows our expiration date, and we're all doing a little bit of guessing in that regard. However, if you're generally healthy, and the people in your immediate family have lived long lives, waiting until age 67, or perhaps even later, to beef up your payout could make sense.
Another intriguing reason to consider claiming at age 67 is that if you have little or nothing saved for retirement. In such a scenario, Social Security is liable to be your primary source of income during retirement. As alluring as filing early to generate extra income might seem, an early claim will permanently reduce your payout when you should be aiming to maximize it. Waiting until 67 to sign up ensures you'll receive at least 100% of your benefit, if not more.
As always, deciding when to enroll for Social Security is a personal decision that requires you to weigh a lot of factors, but this hopefully makes that decision just a little bit easier.