Social Security may very well be the most important social program in this country. Every month, nearly 62 million people receive a benefits check, of which more than 42 million are retired workers. Many of these retirees will lean on Social Security in some capacity to help make ends meet during their golden years. To be more specific, 34% will rely on Social Security for at least 90% of their monthly income, with 62% expecting at least half of their income to be derived from the program.
Yet in spite of its importance, there is no consensus on what could arguably be described as the most important decision any senior will ever make: deciding when to file for Social Security benefits.
How your Social Security benefit is calculated
Benefits for retired workers can begin at age 62, or any point thereafter. However, there's a pretty big incentive to hold off on filing for benefits. For each year you hold off, your eventual payout grows by approximately 8%, up until age 70. Your benefit even grows on a monthly basis, so holding off for an extra three months, or even one month, can incrementally increase what you'll receive.
Your retired worker benefit is also based on your work history, earnings history, and birth year. The latter is what helps determine your full retirement age -- the age where the Social Security Administration (SSA) deems you eligible to receive 100% of your monthly benefit. If you enroll for benefits at any point before hitting your full retirement age, your monthly payout will be permanently reduced by as much as 30%, depending on when you claim and your birth year. Similarly, waiting until after your full retirement age can increase your monthly stipend above and beyond 100% by as much as 32%, also depending on when you claim and your birth year.
The SSA will take into account your 35 highest-earning, inflation-adjusted years when determining your eventual payout. Thus, all things being equal, a retired worker claiming at age 70 can earn up to 76% more per month than a retired worker claiming right at age 62.
So claiming at age 70 is the smart thing to do, right? Not necessarily. Here are six reasons claiming Social Security benefits at age 70 could turn out to be a mistake.
1. You're in poor health
To begin with, if you're not in the best of health, waiting until age 70 to claim benefits likely isn't a smart move. Though claiming benefits based on our health is admittedly a bit of a crapshoot, since we have no definitive way of knowing our expiration date, having a chronic health condition, or having immediate family members not live past the average life expectancy in the U.S. of nearly 79 years, could be a clue to claim earlier.
Remember, your goal with Social Security isn't necessarily to maximize what you receive from the SSA each month, so much as to maximize the net benefits you receive over your lifetime. Thus, even if you make it to age 70 and maximize your monthly payout based on your work and earnings history, you'd need to live until around age 79 to realize the same net lifetime benefits as someone who claimed at age 62, all things being equal. Again, it's a bit of a roll of the dice, but folks in poor health don't usually benefit by waiting till age 70.
2. You're a lower-earning spouse
If you're a significantly lower-earning spouse relative to your partner, waiting to claim benefits until age 70 probably won't make a lot of sense. Generally speaking, a lower-earning spouse's smartest move is to claim benefits relatively early, since that person's payout won't grow too much on a nominal basis by age 70. By claiming early (e.g., before age 66), the lower-earning spouse can generate some income for the household, assuming both members of the couple are retired. More importantly, this monthly income would allow the higher-earning spouse to hold off on enrolling for benefits, letting his or her eventual payout grow, and leading to a larger nominal income boost for the couple during their golden years.
It's also worth mentioning that by waiting until at least his or her full retirement age to claim benefits, the higher-income spouse is helping to maximize the potential survivor benefit for the lower-earning spouse, should the higher-income spouse pass away first.
3. You're in debt
It's an ugly truth, but more and more seniors are entering retirement with debt. We're witnessing a rising tide of seniors with student-loan debt, as well as more and more bearing a mortgage burden. Debt gathers interest over time, so the quicker you can pay it down or off, the better financial shape you'll be in.
Though waiting to file for benefits at age 70 will maximize what you'll receive each month, claiming earlier could help boost your monthly income, allowing you to more quickly pay down your debts.
However, keep in mind that the retirement earnings test could allow the SSA to withhold a portion, or all, of your monthly retirement benefit if your annual income exceeds certain thresholds. This is a fancy way of saying that if you haven't reached your full retirement age, and you're currently working while receiving Social Security benefits, you may not be able to double dip. The good news is you won't lose any benefits withheld by the SSA – it's given back to you in the form of a higher monthly payout once you reach your full retirement age – but it could disrupt your ability to pay down debt if you're also working while claiming benefits. Once you reach your full retirement age, the SSA won't withhold any benefits.
4. You're rich and not reliant on Social Security
Another intriguing reason not to wait until age 70 to claim benefits is if you're wealthy and not expecting to be reliant on Social Security income in any way. Claiming as early as possible would be a means of permanently reducing your payout, and perhaps minimizing your tax burden to Uncle Sam in the process. (yes, up to 85% of your Social Security benefits may be taxable at the federal level). Not to mention, the monthly payout received by the well-to-do can be used to fund their vacations or recreational interest, or be donated to a cause of their choice.
Understandably, an argument can be made that the well-to-do claiming at age 70 makes sense, too. Going an additional eight years without any extra income would probably mean less taxes to pay in those years. However, with the rich living substantially longer than lower-income folks, it would also likely mean more in the way of lifetime net benefits and lifetime taxes paid to Uncle Sam.
5. The taxation of benefits could hit you harder
As noted, yes, you're Social Security benefits may be taxable at the federal level. In 1983, with the program running a long-term (75-year) deficit, the Reagan administration implemented the last sweeping overhaul of Social Security, which came complete with a new taxation of benefits rule. Single taxpayers with adjusted gross incomes (AGIs) above $25,000, and couples filing jointly with an AGI over $32,000, are subject to having half of their benefits taxed as ordinary income. In 1993, under the Clinton administration, a second tier was added that allowed 85% of Social Security benefits to be exposed to federal taxation. Single taxpayers with AGIs above $34,000, and couples filing jointly with AGIs above $44,000, fall into this latter tier.
The issue with the taxation of benefits is these 35-year-old and 25-year-old respective income thresholds have never been adjusted for inflation. Thus, with each passing year, more and more senior households are subject to having their benefits taxed. Therefore, waiting until age 70 and maximizing your monthly payout could mean a higher probability of having to hand back some of your retirement benefit to Uncle Sam.
6. An imminent funding shortfall for Social Security could reduce payouts
Last, but not least, the 2017 report from the Social Security Board of Trustees estimates that the program could begin paying out more in benefits than it's generating in revenue by 2022, leading to a complete depletion of its $3 trillion in asset reserves by 2034. In fact, between 2034 and 2091, Social Security is facing a $12.5 trillion cash shortfall, based on the current payout trajectory. According to the Trustees, an across-the-board reduction in benefits of up to 23% may be needed to retain program solvency through 2091, assuming Congress doesn't find any new ways to generate more revenue.
If you choose to wait to claim benefits at age 70, you're giving up eight years of claiming ability that, while lower on a monthly basis relative to claiming at age 70, wouldn't have been cut by up to 23%. Again, we don't know with any certainty what Congress will do next year or 16 years from now for that matter, but claiming earlier rather than later could reduce your exposure to a substantial cut in Social Security benefits by 2034.