The importance of Social Security can't be overstated. Each month, the Social Security Administration (SSA) sends checks to more than 62 million eligible beneficiaries, of which 42.7 million are retired workers. Of these seniors, 62% lean on Social Security to account for at least half their monthly income. Without Social Security, the senior poverty rate in this country would likely balloon.
The importance of your Social Security claiming decision
Because Social Security income is so consequential to current and future retirees, it can be rightly said that your claiming decision is of the utmost importance. Of the four factors that determine your monthly payout -- work history, earnings history, birth year, and claiming age -- that last one is the biggest wild card of the bunch.
For those who may be unfamiliar with the ins and outs of Social Security, here's a very quick lesson. Aside from the SSA taking into account your 35 highest-earning, inflation-adjusted working years, as well as using your birth year as a guide for figuring out your full retirement age, it'll rely on your claiming age to determine how much you'll receive each month. And the longer you wait to enroll for benefits, the more you'll eventually be paid each month. Your benefits grow by approximately 8% per year, beginning at age 62, and ending at 70. They even accrue on a monthly basis, meaning that waiting even one, three, or six months can incrementally boost your payout.
Now, everything is relative to your aforementioned full retirement age -- the age at which you'll receive 100% of your payout. For most of today's claimants, their full retirement age falls between 66 and 67. Claim benefits at any point before reaching full retirement age and you'll accept a permanently reduced monthly payout. Wait until after your full retirement age to enroll and you can actually receive more than the full payout at your retirement age.
Claiming benefits at age 66 might be your best option
You might be thinking the smartest thing to do is wait until after your full retirement age to claim benefits in order to maximize what you'll be paid each month. This, however, isn't always the best strategy. For example, if you have a chronic health problem, waiting to file for benefits until age 70 might not be smart -- it won't help you maximize what you'll receive from Social Security over your lifetime.
Similarly, claiming too early isn't necessarily the right move, either. While it will make sense for some people, the permanent reduction in your monthly payout can sting over the long run.
Instead, claiming at age 66 might just be the smartest thing you can do. Here are three reasons:
1. You'll be taking into account increased longevity
Claiming at age 66 helps take into account our lengthening life expectancies. Even with increases in life expectancy in the U.S. having stalled somewhat in recent years, it's grown by approximately nine years since 1960. According to the SSA, the average 65-year-old today is set to live about 20 more years. If you claim early, you could be accepting up to a 25% to 30% permanent reduction in your payout. Meanwhile, at age 66, you'd be paid right around 100% of your retirement benefit.
I know you're probably thinking the following: "If the average 65-year-old lives another 20 years, why not wait till age 70 to claim benefits and maximize your monthly payout?" The answer is simple: We don't know our own expiration date. Guessing when to claim benefits based on our health is a total crapshoot, so splitting the difference down the middle at age 66, assuming you're in good or excellent health, is probably going to work out well.
2. It's a smart move to protect your loved ones
An often overlooked aspect of the claiming decision is that it may not be totally about you. If you have a spouse or young children, their eventual payout could depend on your claiming decision.
Today, around 6 million beneficiaries receive survivor benefits as a result of an eligible worker passing away. These beneficiaries tend to be the widows, widowers, or children of the deceased. If the survivor benefit -- which is based on the work history, earnings history, and claiming age of the deceased worker -- is higher than the benefit a spouse would have received from his or her own work and earnings history, then the survivor benefit is chosen.
However, claiming earlier than full retirement age can reduce the survivor benefit that your spouse and/or children receive. If you are the household breadwinner, waiting until age 66 (or your full retirement age) is a smart way to provide a financial foundation for your survivors.
3. It provides some insurance against potential benefit cuts in the future
Waiting until age 66 to file for benefits might be a good way to provide some insurance in case Congress fails the American public and benefit cuts occur within the next two decades as a result.
Without getting into too much depth here, Social Security is in trouble. It's facing a $12.5 trillion cash shortfall between 2034 and 2091, and it either needs new revenue to be generated or expenditures to be cut in order to continue making payments. The Social Security Board of Trustees has predicted that the trust will completely exhaust its asset reserves by 2034. If no new revenue is generated, an across-the-board cut to benefits of 23% may be needed to sustain solvency.
Should you choose to claim at age 62, you'll maximize the number of years between now and 2034 during which you won't have a 23% cut in your benefits. Of course, you'll also be accepting between a 25% and 30% permanent reduction in your monthly payout from full retirement age, as well as setting yourself up for a further 23% cut in 2034 (per estimates). Waiting until age 70 will max out your monthly stipend, but it also reduces your earning potential by the eight years you have to wait to get there. By claiming at age 66, you'll be giving up only four years of earning potential, and you'll wind up receiving around 100% of your payout, depending on birth year. Thus, even with a possible 23% cut on the horizon (which by no means is negligible), retirees would still be in pretty decent shape.
As always, your claiming age is a personal decision that can't be pigeonholed into a single scenario. Yet, claiming at age 66 does offer quite a few benefits that you might have otherwise overlooked.
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