The importance of Social Security for our nation's aged population simply can't be questioned. Of the more than 62 million beneficiaries receiving a check each month, nearly 70% are retired workers. And out of these retirees, more than 3 out of 5 lean on their monthly payout to account for at least half of their income.
Given how reliant seniors are on Social Security during their golden years, there's perhaps no decision that takes more precedence than choosing when to claim their benefit.
The importance of your Social Security claiming decision
As a refresher, Social Security benefits can begin as early as age 62, or at any point thereafter. There is, however, quite the incentive to wait to claim your payout. For each year an individual holds off on claiming their benefit, their eventual payout grows by 8%, up until age 70. All things being equal (i.e., work history, income history, and birth year), a person claiming at age 70 could net a 76% higher monthly payout than someone claiming at age 62.
So, waiting to claim is logically the best move, right? Well, not exactly. A number of factors that include your financial well-being, marital status, and health, to name a few, need to be considered when making your claim. In some instances, waiting is indeed the most logical choice. In other cases, an earlier claim could allow you the best chance to maximize your lifetime payout from the program. This is why there isn't a concrete formula as to when it's best to claim benefits.
There are, however, three situations where it often makes sense to wait as long as possible to claim Social Security benefits.
1. You're healthy, and your immediate family has longevity on their side
Since 1960, the average U.S. life expectancy has increased by nine years, and the percentage of seniors making it to age 65 has increased substantially, too. This makes it all the more important to ensure you're netting enough income each month to make ends meet.
One of the most logical reasons to wait to claim Social Security is if you think you'll live a long life. If you're in your early 60s and in good or excellent health, and your parents have met or exceeded the average U.S. life expectancy, then you may have an above-average chance of living into your 80s, or even longer. The general rule is that if you'll live longer than the average U.S. expectancy of nearly 79 years, then you're liable to collect a larger aggregate benefit over your lifetime by waiting as opposed to claiming early.
Although, the one thing you should understand is that trying to guess your expiration date is somewhat of a crapshoot. We (thankfully) don't know when our time will come, which means we'll never know with 100% certainty if we've made the best possible claiming decision based on our health.
2. You're the breadwinner of the couple
A second scenario where it makes perfect sense to wait as long as possible to claim your Social Security benefit is if you're the income breadwinner of the household.
If you're single, then your claiming decision will revolve around your financial well-being and health. But if you're married, or you happen to have young children, then your claiming decision should also take your family's financial well-being into account.
To begin with, if you're married and you've earned substantially more over your lifetime than your significant other, it makes more sense to hold off on claiming your benefit because a larger payout growing at 8% per year is going to make a bigger income difference later in life for the couple.
The other reason it makes sense is because it could set your significant other up for financial success if you happen to pass away first. A spouse with substantially lower lifetime earnings may have the opportunity to replace his or her retirement benefit with a survivor benefit that's based on their deceased spouse's earnings history. However, this survivors' benefit can be reduced if the worker who passes away claimed earlier than their full retirement age (often between age 66 and 67). Waiting ensures that your loved one(s) have the opportunity to maximize their monthly benefit from Social Security.
3. You're wealthy and don't need the money
A final scenario where waiting to claim benefits makes sense is if you're rich and simply don't need the money. If you're among the roughly 1 in 10 retired workers who aren't reliant on Social Security in any way, then there are two advantages to holding off on your claim.
For starters, if you're not receiving a Social Security benefit between ages 62 and 70, it means that much less income you'll have to pay federal and/or state income tax on. The taxation of Social Security benefits kicks in for individual taxpayers when their adjusted gross income plus one-half of their benefits tops $25,000. For couples filing jointly, this figure is $32,000. The well-to-do are likely to top these figures, meaning they're also likely to pay tax on their Social Security benefits.
The second advantage is that the rich tend to live substantially longer than lower-income folks. Since the well-to-do have no financial constraints when it comes to paying for preventive medicine, medical care, and prescription drugs, their life expectancy tends to be well above the national average. Therefore, claiming benefits later in life, even if that income isn't needed, should result in more lifetime benefits collected, as well as provide income for vacations or hobbies later in life.
Even though there is no perfect claiming formula, there are a few solid reasons to wait until age 70 to sign up for your payout.
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