Nearly 62 million people rely on Social Security benefits each month, making it arguably America's most important social program. Of these beneficiaries, 69% are retired workers, with more than three out of five reliant on the program to provide at least half of their monthly income. It's simply that important to helping seniors make ends meet when they retire.
Yet for as important as Social Security is for the nation's retired workforce, knowledge surrounding Social Security is lacking. A 10-question, true-or-false online quiz that MassMutual Financial Group conducted in 2015 found that only 28% of survey-takers passed with seven out of 10 questions correct, or better. And as you might have surmised, even missing a single question could mean losing out on precious cash during your golden years. Only one individual out of more than 1,500 received a perfect score.
Social Security's biggest battleground
Perhaps nothing is more hotly debated with Social Security than the age you should claim benefits.
As a very brief overview, Social Security benefits for retired workers can begin at age 62, or at any age thereafter, although the Social Security Administration gives you incentive to wait. Beginning at age 62, your payout grows by approximately 8% for each year you hold off on filing for benefits, up until age 70.
Your full retirement age -- the age (determined by your birth year) when the Social Security Administration deems you eligible to receive 100% of your retired worker benefit -- is also important. Put simply, if you claim benefits at any point before reaching your full retirement age, which is between age 66 and 67 for many of today's retirees and labor force, you're accepting a permanent reduction in your monthly payout of up to 30%. On the other hand, waiting until after your full retirement age to sign up for benefits can boost your payout by up to 32%.
All things being equal -- work and earnings history, and birth year -- a retired worker claiming benefits at age 70 can earn up to 76% more per month than a retired worker claiming at age 62.
Claiming at age 70 is the best choice, right?
On the surface, it would appear that claiming at age 70 is clearly the smartest move. However, even though it'll definitely maximize your monthly payout, it may not be your best choice. For instance, if you're a significantly lower-earning spouse, allowing your benefit to grow may not make much sense. Claiming early and allowing your benefit to generate income for the household, while letting the higher-income spouse's benefit increase in value, would be the smarter move.
Similarly, if you have limited earning capacity, waiting until age 70 just may not be feasible. Though the unemployment rate for seniors is generally low, the length of unemployment should you be out of work and looking for new a new job can be quite high. Those unable to find work and generate income might have little choice but to claim their payout well before age 70.
Some beneficiaries might also fear the Social Security Board of Trustees' 2017 report, which suggests that the program could burn through its nearly $3 trillion in asset reserves by 2034, at which time a 23% cut in benefits may become necessary to sustain solvency. Claiming earlier could be a means for some folks to get what they can before a major cut to Social Security benefits.
62 is therefore the best age to claim, right?
Given how many caveats there are to waiting, you might be thinking that claiming early at age 62 must be the best choice. Well, not exactly.
Imagine you're hitting the eligible retirement age with little or nothing saved. Though it might be tempting to begin taking Social Security benefits to put guaranteed income into your bank account, claiming early also means accepting a permanent reduction to your monthly payout. If you have very little saved for retirement, the last thing you should be doing is minimizing your monthly take-home from Social Security.
Opposite of that, significantly higher-earning spouses would be doing no favor to their household, or lower-earning spouse, if they claimed benefits as early as possible. Not only would it reduce household income, but it would also lessen the maximum survivor benefit the lower-earning spouse could receive if the higher-earning spouse passes away first.
62 or 70?
In reality, the debate over which age extreme is best for taking benefits is a complete crapshoot for two reasons, and they both tie into each other.
First, most people are examining the debate with a microscope rather than binoculars. Though waiting will yield a higher monthly payout, the goal isn't to maximize how much you make each month -- it's to maximize what the program pays you over a lifetime. If a retired worker has to wait eight years to maximize the payout, but he or she only lives to age 75, then he or she will have only received five years of payouts. Meanwhile, if this same individual claimed at age 62, he or she would have received reduced payouts, but for 13 years. Even reduced payouts would have led to a higher lifetime benefit under such a scenario. In other words, stop focusing on what you'll net each month, and start focusing on the bigger picture (i.e., net benefits over your lifetime).
Second, and perhaps most importantly, none of us knows our expiration date, which is what makes our claiming choice a true roll of the dice. Social Security benefits tend to hit an inflection point between ages 78 and 80, which is where the amount of lifetime benefits paid is equal for those claiming at ages 62 and 70. Not surprisingly, the average life expectancy in the U.S. is very close to 79 years. Essentially, you have to gamble on whether you'll live significantly past age 79. If you will, claiming later makes sense. If you won't, claiming early will net you the most money over your lifetime. Of course, none of us knows this answer.
Now, I'm not saying there aren't clues that can help guide retirees on when to enroll. But you should understand that there's no concrete guideline, nor will there ever be, on what age is guaranteed to give you the highest lifetime payout.