Today, 62 million people receive a guaranteed payout from the Social Security Administration (SSA) each and every month, of which 42.6 million are retired workers. Of these retirees, a whopping 62% relies on their monthly check to account for at least half of their monthly income. It's simply that important.
The importance of your Social Security claiming decision
However, a worker's claiming decision can dramatically impact how much money they receive each month from the SSA.
There are four factors that ultimately go into determining how much you'll receive each month from Social Security, assuming you qualify for benefits:
- Your work history
- Your earnings history
- Your claiming age
- Your birth year
The first two factors work hand in hand with each other. The SSA will factor in your 35 highest-earning, inflation-adjusted years when calculating your full retirement age benefit. Your full retirement age, as determined by your birth year, is the point where you're deemed eligible to receive 100% of your retirement benefit. In other words, if you claim benefits at any point between age 62, the earliest eligible age to receive benefits, and a month prior to your full retirement age, you'll be accepting a permanent reduction in your payout. Comparatively, waiting until after your full retirement age to enroll for benefits can increase your payout above and beyond 100%.
The real wildcard here is your claiming age. You see, benefits grow by approximately 8% for each year you hold off on signing up, beginning at age 62 and ending at age 70. All things being equal -- work history, earnings history, and birth year -- an individual claiming at age 70 can earn 76% more per month than someone claiming at age 62.
Though they might seem crazy, these are valid reasons to consider claiming Social Security early
With this in mind, you might be under the impression that claiming as late as possible is the smart thing to do. But this isn't always the case. Retired workers who aren't in the best of health and lower-income spouses are traditionally better off if they claim earlier rather than wait. Though they'll be receiving a lower monthly payout than if they waited, these folks usually net a higher lifetime benefit from Social Security, which is the ultimate goal.
However, there are other "nontraditional" reasons to claim benefits early that may prove not to be so crazy over the long run. Here are two perfect examples.
1. As insurance against a benefits cut in 2034
According to the Social Security Board of Trustees' 2017 report, the program is expected to begin paying out more in benefits than it's generating in revenue by 2022, leading to the complete exhaustion of its $3 trillion in asset reserves by 2034. Thankfully, the payroll tax will ensure that Social Security never goes bankrupt, as it'll always be generating cash to distribute to eligible beneficiaries. However, the current payout schedule isn't sustainable, with the Trustees projecting the need for an across-the-board cut in benefits of up to 23%.
Even though waiting until your full retirement age or later can really boost your monthly payout, waiting an extra three to eight years might actually cost you more over the long run if Congress is unable to find a solution to generate more revenue for the program. In other words, claiming early provides a means to maximize your payout at a reduced rate for as many years as possible prior to across-the-board cuts, currently estimated to occur in 2034.
2. To lower your tax liability
Another idea that's not as crazy as you think is claiming early in order to lower your tax liability. Whether you realize it or not, Social Security benefits may be taxable. Single taxpayers earning more than $25,000 in adjusted gross income (AGI) and couples filing jointly making more than $34,000 in AGI could have at least half of their Social Security benefits exposed to federal taxation. Not to mention, 13 states also tax Social Security benefits to some degree. In total, The Senior Citizens League estimates that 56% of senior households pay tax on a portion of their Social Security benefits.
By claiming early and permanently reducing their benefits, Americans who are at most minimally reliant on Social Security can reduce or eliminate what they'll owe Uncle Sam or their state, if it's among the 13 that tax benefits.
In the end, these "crazy" reasons for claiming early might make perfect sense.