How important is Social Security to the average retired worker? According to the Social Security Administration (SSA), 62% of retired workers who are currently receiving benefits count on their monthly stipend for at least half their income. Around a third (34%) rely on Social Security for practically all of their monthly income (90% or more). In other words, without this income, we'd probably see the poverty rate among seniors skyrocket.
Three factors that determine our Social Security payout
Considering that so many current and future retirees are reliant on Social Security, the goal for most people should be to maximize what they'll receive in lifetime benefits. This is done by controlling three of the four factors that determine what we'll be paid monthly once we file our claim with the SSA. We can't control our birth year, which is what determines our full retirement age, or the age where the SSA deems us eligible to receive 100% of our monthly benefit.
Two of the three factors within our control go hand in hand: our work and earnings history. The SSA will factor in your 35 highest-earning years when calculating your retirement benefit. Each year less of 35 worked will result in a goose egg ($0) being averaged into your average annual earnings. This is why working at 35 (or more) years is recommended if you want to maximize what you'll be paid by Social Security.
The third factor you control is your claiming age. You can begin receiving benefits at age 62 or any point thereafter, but there's a pretty notable dangling carrot the SSA uses to entice you to wait. Your benefits will grow by approximately 8% per year, beginning at age 62 and ending at age 70, for each year you hold off on enrolling. In simpler terms, the longer you wait, the more you'll receive once you do sign up.
Four claiming scenarios where waiting till age 70 makes sense
Of course, not everyone has the luxury of waiting until age 70 in order to maximize what they'll receive. Poor health or an inability to find work might coerce some seniors to claim at age 62, or well before their full retirement age. Though these folks are accepting a permanent monthly reduction in their payout by claiming before their full retirement age, for them it's a smart move that should help maximize what they receive in lifetime benefits from Social Security.
For those looking to eke out the maximum monthly payout from Social Security based on their personal earnings history, here are four such scenarios where waiting until age 70 to file for benefits makes sense.
1. You have little or nothing saved for retirement
One of the most logical reasons to wait as long as possible to lay claim to your Social Security benefits is if you've saved little or nothing for retirement. A common error when you have a small or nonexistent nest egg is to claim early and double dip with working wages. Unfortunately, the earnings test may not allow you to receive much, or any, of your Social Security benefit as a result of working and claiming Social Security income simultaneously (at least before your full retirement age).
If you have a small nest egg, or even none at all, you're going to be especially reliant on Social Security income when you retire. That means you'll want to do everything in your power to maximize what you'll be paid each month. Claiming early and accepting a permanent reduction to your payout would be a worst-case scenario. Instead, assuming you're in good enough health to do so, you should work as long as possible, save what you can, and cover your expenses using your working wages. This way, when you file for benefits at age 70, you'll receive the highest possible monthly payout based on your earnings history.
2. You're the higher-earning spouse
A second scenario where waiting until age 70 can be optimal is if you're married and the higher-earning spouse of the couple. Since benefits grow by about 8% annually for each year you wait, a spouse with a higher lifetime earning profile will see a bigger increase in his or her monthly payout by waiting than a lower-earning spouse. This means waiting can pack a bigger punch for the couple once the higher-earning spouse claims their retirement benefits.
In the interim, an elderly married couple can sometimes benefit from having the lower-earning spouse file for benefits early. Since a lower-earning spouse's benefits won't grow as much over time, claiming early could provide the couple with valuable retirement income while the larger benefit grows.
3. You're in excellent health
I freely admit that estimating how long you'll live is a complete crapshoot. No one knows when their expiration date will be with any certainty. However, we do have a pretty good bead on our personal health, as well as that of our immediate family. If your parents and grandparents lived well into their 80s, 90s, or even 100s, and you're also in excellent health, then holding off for a bigger monthly payout might be the smartest move.
While it'll depend on a number of factors, the inflection point in terms of lifetime Social Security benefits accrued usually occurs around age 78. This means that an individual of the same age, work, and earnings history claiming at age 62 and at age 70 will have earned nearly the same amount in lifetime benefits by age 78. If you believe you'll live longer than age 78, or the average American at 78.8 years, then waiting should net you more in lifetime benefits from Social Security than if you claimed early.
4. You're wealthy and generating a good amount of income
A final scenario where waiting until age 70 could make sense is if you're wealthy and won't need Social Security income to make ends meet. The logic here is that holding off between ages 62 and 69 means not having to claim any additional income. Since the federal government taxes a portion of Social Security benefits for individuals earning more than $25,000 annually, and couples earning more than $32,000 annually, passing on receiving benefits is a roundabout way for the rich to lower their tax bill.
Of course, it can be a doubly smart move to wait considering that the rich tend to substantially outlive lower-income folks receiving Social Security benefits. Since the costs of medical care aren't an obstacle for the wealthy as they are for lower-income folks, the rich tend to live considerably longer. A higher monthly payout as a result of waiting until age 70 could come in handy with an extended life expectancy.
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