Each and every month, more than 62 million people, 43.1 million of which are retired workers, receive a Social Security benefit check. Many of these retirees -- greater than three out of five, according to the Social Security Administration -- lean on the program to account for at least half of their monthly income. It's a program that's singlehandedly keeping millions of seniors above the federal poverty line every year.
Considering that most aged Americans will be reliant on Social Security in some capacity by the time they retire, their decision of when to claim benefits may very well be the most important choice they'll make later in life. Make a poor choice, and you could wind up leaving tens of thousands of dollars in lifetime benefits on the table.
With this in mind, here are 12 Social Security essentials that all future retirees should consider before laying claim to their retired worker benefit.
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1. Have you worked enough?
First off, look back at your work and earnings history and make sure you've worked enough to receive retired worker benefits. Despite the belief that Social Security is an entitlement for Americans, it's not. You receive a retired worker benefit by earning 40 lifetime work credits, of which a maximum of four may be earned in a given year.
What's it take to earn a lifetime work credit? In 2018, it's just $1,320 in earned income, although this figure tends to increase somewhat in step with inflation. That means $5,280 in earned income will max out your credits for the year. Do this for 10 years, or build up your credits over the course of your lifetime, and you'll qualify for Social Security benefits after hitting age 62, the age at which you're first eligible to claim benefits.
2. There's an incentive to wait
Even though you're eligible to begin taking benefits at age 62, the program gives folks incentive to wait. For each year that you hold off on claiming benefits, your eventual payout grows by approximately 8%, until age 70.
Assuming we were looking at two identical individuals -- i.e., same work history, earnings history, and birth year -- the one claiming at age 70 could earn as much as 76% more per month than the one claiming at age 62.
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3. Your full retirement age
Next, you should absolutely know your full retirement age, or the age at which the Social Security Administration will pay you your full benefit. Finding your full retirement age is exceptionally easy, because it's determined by your birth year. For baby boomers and all future retirees, your full retirement age is likely to fall on or between ages 66 and 67.
To put this in another context, if you claim benefits before reaching your full retirement age, you'll be accepting a permanent reduction to your monthly check. Conversely, you could actually net in excess of your full benefit if you wait until after your full retirement age to sign up.
4. Your health
So, everyone should wait until age 70 to maximize their monthly payout, right? Well, not exactly. Upcoming claimants should take their health into account when applying for their benefit. Though none of us has a crystal ball identifying our expiration date (and I don't think we'd want that, anyway), our health can help guide us toward a smart claiming decision.
For example, if you have one or more chronic health conditions, your chances of living to the average life expectancy of nearly 79 years may be compromised. In this instance, claiming benefits before your full retirement age may give you the best chance of maximizing your lifetime payout. The opposite is also true, in that a healthy individual might be best off waiting until full retirement age or later to lay claim to his or her retired worker benefit.
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5. Your marital status
You'll also want to consider your marital status before signing up. If you're single and have no young children to consider, then your claiming decision is entirely your own. If, however, you have a wife or husband and/or young children, their financial needs could play a role in your decision to take benefits.
How so, you ask? If you happen to have made significantly more than your spouse over your lifetime, and you pass away first, your surviving spouse may be able to increase his or her take-home income (relative to your spouse's own retired worker benefit) by claiming a survivor benefit based on your earnings history. However, this survivor benefit could be reduced depending on whether you signed up to receive benefits before reaching your full retirement age.
Long story short, if you're married or have young kids, their interests should count, too.
6. Your financial health
Before you claim Social Security, you'll also want to take into account your own financial health. Hopefully, you've been saving and investing for decades and only have to rely on Social Security as a secondary or tertiary income source. However, if you haven't saved up for retirement, that's a different story.
For instance, if you have very little saved for retirement and plan to lean heavily on Social Security, then you'll probably want to wait as long as possible before taking your benefit. Remember, while it may be tempting to claim early, you'll be accepting a lifetime reduction in your monthly payout if you do so.
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7. Are you still working?
Aged beneficiaries should take into consideration whether or not they plan to work while receiving Social Security benefits. If you've hit your full retirement age, then this isn't something to be concerned with; but if you're younger than age 66, or have yet to hit your full retirement age, then the retirement earnings test may apply to you.
What's the retirement earnings test? Put simply, if you earn too much in a given year while also receiving Social Security benefits, the Social Security Administration can withhold some or all of your benefit. You do get that benefit back after you hit your full retirement age, but it prevents early filers from double-dipping with their working wages.
Workers who won't hit their full retirement age this year, and who earn in excess of $17,040 a year, can have $1 in benefits withheld for each $2 in earned income above this level. Meanwhile, if you will hit your full retirement age later this year but haven't yet done so, $1 in benefits can be withheld for every $3 in earned income above $45,360.
8. The average retired worker payout
Claimants will want to be aware that a Social Security benefit check isn't going to make them rich. In June 2018, according to the Social Security Administration, the average retired worker was bringing home $1,413.37 a month.
Though this nearly $17,000 annual benefit is keeping millions of current retirees above the federal poverty line, the program isn't designed to be a primary income source. The Social Security Administration suggests that benefits are only designed to replace approximately 40% of a person's working wages. That means you're expected to have another primary source of income.
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9. The well-being of Social Security
Future beneficiaries should also be keeping a close eye on the well-being of the Social Security program. Even though it's in absolutely no danger of going bankrupt, the latest Social Security Board of Trustees report clearly forecasts trouble.
With the current payout schedule proving unsustainable, the program is expected to exhaust its $2.9 trillion in asset reserves by 2034. Should Congress not raise any additional revenue and/or cut benefits before this time, an across-the-board benefits cut of 21% may be needed to sustain payouts through 2092. Should a benefits cut come to fruition, that could certainly affect the claiming strategies for Generation X and millennials.
10. COLA isn't keeping up
Another sad Social Security essential is that the program's annual cost-of-living adjustments (COLAs) simply aren't keeping pace with the actual inflation rate seniors are facing. The inflationary measure responsible for calculating the program's annual COLA, the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), takes into account the spending habits of working-age urban and clerical workers, and not seniors. This results in key expenditures for seniors, like medical care and housing, being underrepresented.
According to a recent analysis from The Senior Citizens League, the purchasing power of Social Security dollars has declined by a whopping 34% since the year 2000, and this trend shows no signs of slowing anytime soon.
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11. Know that you have the SSA-521 option in your back pocket
Would you prefer to wait to claim benefits, but you need the income now? Always remember that you have Form SSA-521 (officially, the Request for Withdrawal of Application) in your back pocket.
If your request is approved, SSA-521 allows you to undo your claim within 12 months of when you begin taking benefits. For example, if you signed up because you've been out of work and need income, and then land a well-paying job within 12 months, you can apply to have your claim undone, allowing your payout to grow at 8% per year once again (if your request is approved).
The catch? You'll have to repay every cent the Social Security Administration has sent you, as well as any benefits that may have been claimed by someone else, such as young children or a spouse, based on your claim and earnings history.
12. Understand that there is no perfect claiming age
Last, but not least, be aware that even after taking into account all of these considerations, there is no such thing as a perfect claiming age. The age that's best for you is the one that'll hopefully maximize your lifetime payout. Sometimes that means claiming early, while other times it means waiting. Because we don't know our expiration date, we can never know with any certainty if we've made the smartest possible choice. We can, however, use these considerations to make as informed of a choice as possible.
