For many retired Americans, Social Security isn't just another paycheck -- it's a financial foundation to stand on. According to data from the Social Security Administration (SSA), more than 61 million people were receiving Social Security payouts as of March, and two-thirds of these recipients were retired workers.
Of these 41.6 million retired workers, more than 25 million rely on their monthly benefits check to account for at least half of their monthly income. In plainer terms, without Social Security, we'd probably see the poverty rate for seniors head significantly higher.
Baby boomers are expected to lean heavily on Social Security
However, the program that provides financial security to millions is also on the precipice of a major change. The Social Security Board of Trustees' 2016 report suggests that, by 2020, we'll begin to see more benefits paid than revenue brought in via payroll taxes, interest earned on excess cash, and the taxation of benefits, combined. By 2034, the Trust's more than $2.8 trillion in spare cash is expected to be completely gone, leading to what the actuaries predict could be up to a 21% cut in benefits for all recipients. It's a pretty gloomy forecast.
Yet, despite the gloominess, baby boomers are expected to lean nearly as heavily on Social Security as their parents did. According to a report from the Insured Retirement Institute (IRI) last year, some 59% of baby boomers surveyed anticipate that Social Security will be a "major" form of income during their retirements. This was up from just 43% in 2014.
The upward swing in Social Security reliance could suggest two factors at play. First, we had the Great Recession, which walloped boomers' stock portfolios, causing many to head for the sidelines. Many have since missed the rally in U.S. stocks to new all-time highs.
Secondly, savings rates are particularly poor in the U.S., which includes baby boomers. The same IRI report referenced above showed that 45% of baby boomers hadn't saved a dime toward their retirements. Comparably, the 2014 survey showed that a mere 20% weren't saving for their retirement. This lack of savings could preempt a reliance on Social Security income during retirement.
When boomers lay claim to their benefits will matter a lot
There's a pretty wide variance of what baby boomers could get paid from Social Security once they choose to take benefits. In addition to your earnings history and length of work history, which impact your eventual monthly benefit, your claiming decision makes a big difference.
Social Security allows retirees to begin taking benefits at age 62, or any point thereafter. There is, however, a dangling carrot in the form of a higher payout if you wait. For each year people hold off on signing up for Social Security, their payouts will grow by about 8%, up until age 70. This means that a person filing for benefits at age 70, when compared to someone who has an identical birth year, length of work history, and earnings history but claims at age 62, could earn up to 76% more each month.
Equally important is your understanding of your personal full retirement age. Determined by your birth year, your full retirement age is the point where the SSA deems you eligible to receive 100% of your monthly benefit. Sign up before hitting your full retirement age and your benefits will be cut by up to 25% to 30%. Wait until after your full retirement age to enroll, and you could earn an extra 24% to 32% on top of your expected full-retirement payout.
So how many people wait until age 70 to claim benefits? According to the findings of the Center for Retirement Research at Boston College, a mere 3% of seniors wait till age 70 or later to claim benefits. On the other hand, 60% tend to claim benefits between ages 62 and 64, and in the process, wind up taking up to a 25% to 30% haircut in their monthly payouts.
Baby boomers need to know about this do-over clause
The natural inclination of baby boomers who are hitting retirement age and have little or nothing saved up might be to claim Social Security as early as possible in order to generate income -- especially if they've had trouble securing a job. However, this will almost certainly prove to be a monumental mistake, as filing early means accepting a permanent reduction in your monthly payout for the remainder of your life. If you're planning to lean on Social Security, you should be looking to maximize, not minimize, your monthly benefits check.
But the data is pretty telling: A majority of seniors do enroll early in Social Security, and they wind up with a smaller monthly check than if they'd waited just a few more years.
What baby boomers may not realize is that they have a tool in their corner that they may be able to deploy that'll undo a regrettably early filing claim and allow their benefits to grow once more. Form SSA-521, officially the "Request for Withdrawal of Application," allows retirees who've recently enrolled in Social Security to undo their claims. It comes with two catches, though.
First, you only have 12 months after you begin receiving benefits to file Form SSA-521. That may not sound like a lot of time, but it's plenty of time to reconsider your decision to continue receiving benefits if you've landed a new job, or collected a decent sum of money through an inheritance or life insurance policy.
Secondly, you'll need to pay back every cent in benefits you've received to the SSA in order for your claiming benefit to be undone. This includes any money that may have gone to a spouse or child, based on your claim.
If you return what's been paid to you within 12 months and the SSA processes your application, it'll be as if you'd never claimed early in the first place. This way, your benefit can continue to grow, and you'll be able to pocket as much as 124% to 132% of your full retirement age payout, depending on your birth year.
Form SSA-521 is the mulligan that every baby boomer with little to nothing saved for retirement needs to know about.