Whether you realize it or not, there's a very good chance that today's working Americans will be reliant on Social Security income, in some capacity, when they retire. A Gallup survey from April 2018 found that more than 4 out of 5 surveyed non-retirees expect to lean on Social Security as either a major or minor income source during their golden years.
This suggests that the most important decision any senior will make is deciding when to claim Social Security benefits.
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How your Social Security payout is determined
As a brief refresher, there are four primary factors that determine what you'll be paid by the Social Security Administration (SSA) on a monthly basis. The first two -- your work history and earnings history -- are tied at the hip. The SSA takes an individual's 35 highest-earning, inflation-adjusted years into account when calculating their monthly benefit at full retirement age. Each year less of 35 worked results in a $0 being averaged in your total.
The third factor taken into account is your birth year, which is something we have no control over. Your birth year determines your full retirement age, or the age at which you become eligible to receive 100% of your monthly payout. The simple rule is that claiming your benefit at any point prior to reaching your full retirement age will result in a permanent reduction in your payout, whereas waiting until after your full retirement age can boost what you'll receive each month.
Lastly, there's your claiming age. As alluded, your claiming age, relative to your full retirement age, will determine how much of a reduction or boost you'll see in your payout. Retired worker benefits can begin as early as age 62, with your eventual payout increasing by approximately 8% annually for each year you hold off on claiming, up until age 70.
So, how much extra would you receive each month if you decided to wait? Let's take a look.
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Here's how waiting can boost your Social Security benefit check
Obviously, everyone's situation will differ based on their work and earnings history, as well as their birth year, but we can use the average monthly payout of retired workers to offer a pretty good idea of what waiting would do to your monthly benefit check.
As of November 2018, per the SSA, the average retired worker brought home $1,420.10 a month. I know that probably doesn't sound like a lot, but remember that Social Security income is designed to replace only about 40% of the working wages of the average American in retirement.
For most Americans, their full retirement age will be either ages 66 or 67, or some figure in between. According to the SSA, waiting to claim until age 70 will result in a monthly payout increase of between 24% (for those born in 1960 or later) and 32% (for those born between 1943 and 1954), with some figure between 24% and 32% for those born between 1955 and 1959. Assuming this average worker was born in 1954, he or she would be on track to receive up to 32% more than at full retirement age. Instead of $1,420.10 per month, this worker could net $1,874.53 per month. That's an extra $5,453.16 per year.
For future generations of retirees who were born in 1960 or later and have a full retirement age of 67, the maximum boost they can receive for waiting is 24%. Again, using the average benefit as of November 2018 as the basis, it would result in a monthly check of $1,760.92, or an extra $4,089.84 a year.
Once again, this may not seem like a lot, but with longevity having increased in recent decades, Social Security has been crucial in keeping elderly Americans above the federal poverty line.
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Waiting isn't always the answer
Clearly you can earn more per month by waiting, but should you choose to hold off on your claim? Sometimes the answer is no.
Although I can't emphasize enough that every case will be unique, there are a few situations where claiming early tends to make sense. For instance, if you're not in the best of health or have a chronic health condition, an early filing may be in your best interest. After all, it's not about what you're paid per month so much as what you'll net from Social Security over your lifetime.
If you're a lower-earning spouse, claiming early could be worthwhile in that it generates income for your household while allowing your higher-earning spouse's eventual payout to grow.
Additionally, if you have no other sources of income or limited earning capacity, claiming early might be your only choice to generate income.
Comparatively, holding off on your claim can make a lot of sense if you're in excellent health and have longevity among your immediate family members, are a significantly higher-earning spouse, or have very little saved for retirement and will be leaning on Social Security as a major source of income.
The point being that you'll need to take the time to examine your financial, health, and marital status to determine which pathway will give you the best chance to maximize your lifetime payout.
