As of March, more than 61 million people were receiving a Social Security check each month. Two-thirds of these monthly payouts are headed to our nation's retired workers, 61% of which rely on their Social Security benefits to account for at least half of their monthly income. You could rightly say that without Social Security, millions of seniors would probably be struggling to make ends meet during retirement.
America's most important social program is in trouble
While we can all be thankful for a program like Social Security, we also have to recognize that America's most important social program is in a bit of a bind. The architects who crafted Social Security in the 1930s couldn't have foreseen the boom in baby births following World War II or the rapid advancement in medical care that's pushed the average life expectancy higher by roughly nine years over the past five decades. The result is the ongoing retirement of baby boomers and lengthening of life expectancies is weighing on Social Security.
According to the Social Security Board of Trustees 2016 report, the program will begin paying out more in benefits than it's bringing in via revenue by 2020, ultimately culminating in it burning through its more than $2.8 trillion in excess cash by 2034. Should this spare cash be depleted, an across-the-board benefits cut of up to 21% may be needed to sustain payouts through 2090. It's not exactly an optimal scenario given retired workers' reliance on Social Security.
Though we'd love for Congress to step in and pass bipartisan legislation to fix Social Security for future generations, we can't count on that happening. Instead, we have to focus on the three factors we can control that influence our Social Security benefit: our earnings, our work history, and our claiming age.
Ways we can impact our Social Security benefit
The first two factors, earnings and work history, are somewhat interconnected. The Social Security Administration (SSA) averages your 35 highest-earnings years when calculating your monthly benefit, therefore it's in your best interest to earn as much as you can each year, and to work a minimum of 35 years. For each year less than 35 worked, a $0 will be averaged in by the SSA, dragging down your eventual payout.
The big "X-factor" is when you decide to claim Social Security benefits. The SSA allows qualifying seniors (those who've collected 40 lifetime work credits) to begin collecting as early as age 62, or at any point thereafter. Of course, there's a very lucrative reason to hold off on your claim: your benefits grow by about 8% per year for every year that you wait, until age 70. This means an individual claiming at age 70 could have a monthly payout that's 76% higher than someone claiming at age 62, assuming identical annual earnings, work length, and birth year.
The most important number involving your claim is your full retirement age, or FRA. Your FRA is the age at which the SSA deems you eligible to receive 100% of your monthly payout, and it's determined by your birth year. This year's newest eligible retirees (those born in 1955) have an FRA of 66 years and two months.
Put simply, if you claim benefits at any point before hitting your FRA, your benefits will be permanently reduced by up to 25% to 30%, depending on your birth year. Conversely, if you claim benefits at any point after you've hit your FRA, you can boost your payout by up to 24% to 32%, depending on your birth year.
Taking Social Security at full retirement age could be a smart move
Though the decision of when to claim is entirely personal and dependent on a number of factors, including your income needs, savings, health, and whether a spouse will be reliant on your income (to name a few factors), claiming at your full retirement age might be a great idea. Here are three reasons why.
1. You'll get every penny that you're due
Arguably, the best reason to claim at your full retirement age is that you'll get 100% of your due benefit in retirement. With around three-fifths of seniors dependent on Social Security as a "major" source of income during retirement, seniors' focus should be on maximizing their payout and netting at least 100% of their benefit as opposed to accepting a permanent reduction by claiming before they hit their FRA.
Also, with the possibility of a benefits cut on the table within the next two decades, claiming early and accepting a permanent reduction in your payout could really put you in bad shape financially. Waiting until at least your FRA to claim won't make a future cut in benefits less painful necessarily, but it'll leave you with far more each month if that's the path Congress chooses to take.
2. It can maximize spousal benefits
Secondly, it's important to realize that while your claiming decision is personal, it may not effect only you. If you have a spouse, your claiming decision could impact what he or she may receive via spousal benefits.
A good example is if there's a wide gap in lifetime benefits between a higher-earning spouse and lower earning spouse. If a higher earning spouse waits to claim until their full retirement age, the lower-earning spouse will have the option of taking up to half the spousal benefit based on the higher earnings spouse's work history or their own benefit based on their work and income history. The SSA will pay out whichever is higher. If you claim earlier than your FRA, your spouse's benefit will be reduced as well. They'll still get the higher benefit of the two (spousal vs. their own benefit), but it could be lower than if you'd have waited.
Long story short, waiting until your FRA can put your spouse on solid financial footing over the long-term.
3. It'll encourage workers to stick to their savings game-plan
Finally, it's worth pointing out that America has a major saving problem. The St. Louis Federal Reserve data from March shows the personal savings rate at just 5.9%, which is half of what it was 50 years ago and well below the recommended 10% to 15% that financial advisors suggest workers sock away for retirement. The end result is workers' poor saving and extra cautious investing habits have them extra reliant on Social Security come retirement.
However, Social Security was never designed to replace more than 40% of the average workers' income during retirement. Waiting to claim until your FRA would serve a key purpose: it'd keep you honest with your budget by forcing you to save and invest. Since you can't count on your health and the ability to work until age 66 or 67, claiming at your FRA means you'll need to have built a large enough nest egg to cover your expenses through the first couple years of retirement prior to claiming Social Security benefits.
Waiting until your full retirement age won't be right for everyone (e.g., those in poor health, lower-income spouses, or those who can't find work or generate income), but for a majority of seniors it looks to be a smart move.
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