Whether you realize it or not, you're probably going to be reliant on Social Security for a portion of your retirement income. According to data from the Social Security Administration (SSA), 62% of current retirees lean on the program for at least half of their income, with just over a third reliant on Social Security for virtually all (90%-plus) of their income.
This more or less corroborates surveys conducted by Gallup of retired and non-retired individuals. Of the retirees, just 1 in 10 aren't reliant on their Social Security income in any way. Meanwhile, more than 4 out of 5 non-retirees expect to lean on their retirement benefit as a major (30%) or minor (54%) income source.
All of this data leads to one conclusion: Your claiming age is extremely important.
Your claiming age can have a huge impact on your monthly benefit check
As a refresher, there are four factors that have a high bearing on what you'll be paid by Social Security during retirement, assuming you've earned the required 40 lifetime work credits to receive a benefit. The first two factors are intertwined: your work history and earnings history.
When calculating your retirement benefit, the SSA will take into account your 35 highest-earning, inflation-adjusted years. If you have any hope of maximizing what you'll receive from the program, you'll want to work at least 35 years to avoid any zeros being averaged in for each year you didn't work.
The third factor, which we have absolutely no control over, is your birth year. The year you're born determines your full retirement age, or the age at which you become eligible to receive 100% of your retirement benefit. Put simply, claiming benefits prior to your full retirement age will result in a permanent reduction to your monthly benefit of as much as 30%, whereas claiming after your full retirement age can boost your payout by as much as 32%, all depending on your birth year.
The final factor is your claiming age. Retirement benefits can be claimed as early as age 62, but the SSA gives people incentives to wait by increasing their payouts by 8% per year, up until age 70. Assuming you were looking at two identical individuals (i.e., same work history, earnings history, and birth year), the one claiming at age 70 could receive a monthly payout that's up to 76% per month higher than the individual claiming as early as possible at age 62.
So, everyone obviously waits then, right? Well, not exactly.
Expect a claiming-age trend reversal next decade
Historically, a majority of Americans claim benefits prior to reaching their full retirement ages. Whether that's because they need the money or simply don't understand their options isn't clear. What is clear is the data, which showed that 60% of retired workers in 2013 took their benefits between ages 62 and 64, with another 30% claiming at ages 65 or 66 (age 66 was the full retirement age in 2013). Comparatively, just 1 in 10 retirees took their benefits after their full retirement age.
However, there has been a modest reversal of this trend in recent years. Data from the SSA finds that more people are waiting to take Social Security, albeit very few are still waiting until after their full retirement age. At last check, 57% were claiming prior to their full retirement age, with 34.3% signing up at age 62. Of course, this data also includes those folks receiving a disability payout and is therefore not an apples-to-apples comparison to the 2013 data.
This push to a later claiming age is certainly preferable, especially with the average American living longer than their parents or grandparents and potentially needing more income for a longer period of time. But as time passes, my suspicion is we'll again see this trend reverse, with more retirees choosing to claim earlier rather than waiting.
The reason? A forecasted cut to Social Security benefits, as highlighted in the 2018 Trustees report.
Benefit cuts could be coming, and retirees will want to stay ahead of the curve
According to the Trustees report, Social Security will face an inflection point this year. In other words, it'll expend more than it collects in revenue for the first time since 1982. This might not seem like a big deal, but this net cash outflow is expected to rapidly grow in size beginning in 2020 and beyond.
By the time 2034 rolls around, the program's $2.89 trillion in asset reserves is expected to be completely gone. Should this happen and Congress fails to generate additional revenue and/or institute expenditure cuts, a projected across-the-board cut to benefits of 21% would be needed to sustain payouts through 2092.
There are two considerations to make here. First, there are a lot of Americans who incorrectly believe that Social Security running out of its excess cash means the program is insolvent. In fact, more than half of all millennials surveyed by Pew Research Center in 2014 believed they wouldn't receive a red cent from Social Security by the time they retire. This fear of Social Security going bankrupt (which actually can't happen) is probably one driving force for early claimants.
The other consideration here is the notion that benefits could be slashed by more than a fifth come 2034. Workers who come of claiming age in the next five to 15 years are probably going to give serious consideration to taking their benefits sooner rather than later and reaping the rewards of a check that isn't reduced by up to 21% (even if claiming early will itself result in a permanent monthly reduction).
Is this the right move?
But is it the right move? The honest answer is, no one knows. Congress could allay these concerns by passing a bipartisan fix to the program that doesn't result in a huge benefit cut in less than two decades' time, which would make early claimants none-too-pleased.
We also (thankfully) don't know our expiration date, which means that we can never be certain that we're making the best possible claiming decision. And by "best possible," I mean the decision that results in the highest amount of lifetime benefits being received.
What I do believe is that the longer Congress waits to act and the larger Social Security's cash shortfall becomes, the more likely it is that we'll see aged beneficiaries making earlier claims.
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