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Here's Why Picking the Right Social Security Claiming Age Is So Hard

By Sean Williams - Updated Jul 11, 2018 at 2:31PM

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Choosing when to begin taking benefits involves a bit of science and luck.

Chances are that if you're currently retired, or you're among an estimated 175 million workers who are covered by Social Security and on track to receive a retirement benefit in the future, you'll be in some capacity reliant on the program to make ends meet during your golden years.

According to two recently released surveys from national pollster Gallup, 57% of current retirees lean on Social Security to be a "major source" of income, with another 33% counting on the program as a "minor source." Meanwhile, 30% of nonretirees expect that Social Security will play a major role in their monthly take-home during retirement, with 54% expecting it to be a minor source of income. That's a combined 90% of current retirees and 84% of nonretirees who are, or will be, in some capacity reliant on Social Security to make ends meet. 

A person filing out a Social Security benefits application form.

Image source: Getty Images.

Because of the role Social Security is playing or will play for most Americans, there's arguably no decision more important than deciding when to claim benefits. Though there are actually seven factors that could impact how much you're paid by Social Security and ultimately what you'll be able to keep, your claiming age could lead to the greatest variance in your monthly payout.

The most important factors in determining your Social Security benefit

As a very brief refresher, the Social Security Administration (SSA) utilizes four factors when determining your monthly payout at full retirement age. The first two -- your work history and earnings history -- go hand in hand. The SSA will take into account your 35 highest-earning, inflation-adjusted years when calculating your retirement benefit. Should you not work at least 35 years, a $0 will be averaged in for each year less of 35. This is why working into your 50s and 60s can be especially helpful to your Social Security benefit, since the skills and experience you've built up over many decades should allow you to command a higher salary, thus bumping up what you'll receive when you retire.

The third factor taken into account by the SSA is your birth year, which determines your full retirement age, or the age at which you become eligible to claim 100% of your benefit. For most Americans, their retirement age will be 66 or 67, or land somewhere in between. To keep things simple, if you claim benefits prior to reaching your full retirement age, you'll be accepting a permanent reduction to your payout. Conversely, if you wait until beyond your full retirement age to sign up for benefits, you could receive an even bigger payout.

A person holding up a puzzle piece with a question mark drawn on it.

Image source: Getty Images.

The last important factor is your claiming age. Retired worker benefits can begin at age 62, or any point thereafter. The catch being that for each year you hold off on taking your payout, your monthly benefit will grow by approximately 8%, up until age 70. Hypothetically speaking, if we were looking at two identical people (i.e., same work history, earnings history, and birth year), the one claiming at age 70 could net 76% more per month than the one claiming as early as possible at age 62.

Here's why it's so difficult to pick the perfect claiming age

As you can see, your claiming age can create a pretty wide variance in what you'll be paid each month. Of course, keep in mind that monthly pay isn't the most important variable to consider when claiming Social Security benefits. The ultimate goal is to get as much money from the program as possible over your lifetime

That brings me to my main point: choosing the perfect claiming is difficult. At best, it's an imperfect science, and there are three reasons for that.

1. There's no concrete formula

For starters, there is no concrete formula that retired workers can follow when making their claiming decision, because personal, financial, marital, and other intangible factors will differ from person to person.

As an example, a single 65-year-old with no children and little money saved up is going to have markedly different needs from Social Security than a married 65-year-old with two grown children and a decently sized nest egg. Though there are factors you should take into consideration that can help you make an informed claiming decision, these personal factors introduce variability that doesn't guarantee you're making the absolute best choice.

A senior man shrugging his shoulders.

Image source: Getty Images.

2. We don't know our expiration date

Second, the only way to know for certain that we're making the right claiming choice -- and by "right choice" I mean netting the most possible over our lifetime from the program -- would be if we knew our expiration date. Unfortunately (or perhaps I should say fortunately), this isn't something anyone knows. Some Americans live to be well into their 90s or 100s, and the average 65-year-old is on track to live another 20 years, according to data from the SSA. Without knowing our expiration date, we can only make an educated guess using our own health history and that of our immediate family. This makes our claiming age somewhat of a crapshoot.

3. We're too shortsighted and focusing on the wrong number

Finally, as noted, it's my suspicion that Americans have a hard time focusing on the bigger picture. If they're too focused on what they'll receive from Social Security on a monthly basis, they're liable to overlook the bigger picture payout, which is far more important.

For instance, a person with chronic health conditions could choose to wait until age 70 to maximize their monthly payout. However, this chronic health condition may shorten their life expectancy, providing only a few years of this higher monthly payout. In this instance, claiming earlier could provide a larger lifetime benefit, even if the monthly payout is reduced.

Ultimately, picking the right claiming age is a bit science and a little luck -- that's what makes it such a difficult decision.

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