According to the Social Security Administration's latest update in August, more than 61 million people were receiving a Social Security check each month -- and 68.4% of these folks were retired workers. Out of these 42.1 million retirees, over 60% will rely on their monthly check to account for at least half of their income. That's how important Social Security is to the financial well-being of our nation's retired labor force.
Of course, Social Security isn't exactly making the average retiree rich. The average payment to retired workers as of August 2017 was $1,371 a month, or just $16,454 a year. That's not much higher than the poverty rate, yet it's a much-needed source of income that ensures most retired workers can make ends meet during their golden years.
How your Social Security benefit is calculated
Your Social Security payment is the product of four factors: your work history, earnings history, claiming age, and birth year. The latter you can't control, but it helps determine your full retirement age, or FRA, which is the age at which you'll receive 100% of your monthly benefit.
Your work history and earnings history are two factors that go hand-in-hand. The SSA calculates your average monthly earnings that'll be used to determine your monthly benefit at FRA by taking into account your 35 highest-earning years. This means workers should strive to work at least 35 years to maximize their payout -- each year less of 35 worked results in a $0 being averaged into your earnings history -- as well as earn as much as possible each year.
The other factor that's within your control is your claiming age. If you sign up for benefits at any point between age 62 and a month prior to your FRA (which is between ages 65 and 67, depending on your birth year), you'll be accepting a reduction to your monthly payout from the SSA. If, on the other hand, you wait to enroll until after your FRA and up until age 70, the last age at which benefits accrue at an 8% annual rate, your monthly payout could be excess of the 100% you'd have received at your full retirement age.
Why do a majority of retirees claim Social Security benefits early?
So, what do most seniors choose to do? Data from the Center for Retirement Research at Boston College, utilizing SSA claims in 2013, found that 45% of seniors claims Social Security at age 62. Overall, 60% choose to enroll between ages 62 and 64, with another roughly 30% signing up at their FRA (ages 65 or 66 in the example). Just 10% were waiting until ages 67 to 70 to enroll. In other words, a majority of seniors are willingly taking a hit to their future payouts by claiming early.
Why do most seniors claim Social Security benefits early? A recently released survey from the National Retirement Institute (NRI) posed this very question to current retirees, both newly retired and those who'd retired more than 10 years ago. While a multitude of responses was offered, six reasons were particularly popular as to why current retirees chose to take benefits early. Please note that retirees could select as many reasons as were applicable to their situation.
1. To pay my living expenses (46%): Nearly half of all current retirees who claimed benefits early did so to make ends meet. In particular, 51% of new retirees claimed early to pay their living expenses. This is actually very worrisome, considering that claiming early and accepting a lifetime reduction in your payout is probably the worst thing you can do if you have very little saved for retirement and will be reliant on Social Security for a majority of your income. Working as long as possible and holding off on enrolling for Social Security benefits, assuming you're healthy, would be the preferred solution if you're going to be leaning on Social Security income during retirement.
2. To supplement my income (36%): Along similar lines, over a third of current retirees affirmed that they'd claimed benefits early to supplement their income. Whereas "paying living expenses" was the most popular answer among new retirees, claiming early to supplement their income was a popular answer (43%) among those who've been retired for 10 or more years. Since pensions were far more prevalent in the past than they are now, utilizing Social Security as an income supplement makes perfect sense.
3. I retired earlier than expected (26%): Surprisingly, the third most popular reason to take Social Security benefits early is because roughly a quarter of current retirees hung up their work gloves earlier than expected. Unfortunately, the reasons for early retirement aren't broken out, so we can only assume some reasons were good, and others weren't. For those who saved and invested diligently, claiming Social Security early might be a way of adding income for travel purposes, or to keep their tax liability as low as possible by reducing their payout a bit.
4. I have a health issue (24%): While some working Americans who haven't saved much for retirement simply plan on working longer than expected to make up the difference, that's not always an option. In fact, NRI's survey showed that 85% of recent retires, and 65% of those who retired at least 10 years ago, experienced health problems sooner than expected. Of those who did experience early health problem, 59% of recent retirees and 73% of those retired for at least 10 years noted that these health problems manifested at least five years earlier than they'd expected.
5. I was laid off or unemployed (22%): Building off that previous point, there's also no guarantee that your employer will keep you around into your 60s or 70s. Though senior unemployment rates are rather low, likely a result of the skills and experience accumulated over a lifetime in the labor force, it could be difficult if laid off to get back into the workforce. Some 28% of recent retirees cited being laid off or unemployed as a key reason why they filed for benefits early.
6. I have no other source of income (20%): A final answer that one in five current retirees affirmed is that they had no other source of income. This may not come as a surprise, given data from the St. Louis Federal Reserve showing that only 3.6% of income was being socked away as savings in August 2017. Comparatively, we were saving more than three times as much of our income 50 years ago. This lack of saving is setting us up for failure later in life and forcing us to be more reliant on Social Security than we should be.
Are there valid reasons to claim benefits early and accept a reduction in your monthly benefit? Yes. Some of these reasons include being in poor health, being a considerably lower-income spouse than your partner, or being wealthy and either wanting to reduce your long-term tax liability or preferring to use your benefits for leisure purposes. However, claiming early if you have little saved for retirement, and if you're healthy, could be a major no-no, although it everyone's financial situation is unique.
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