Out of the roughly 60 million Americans who currently receive Social Security, a huge proportion rely on the program for the majority of their income. The decision about when to claim Social Security is one of the biggest you'll ever make, and the choice will have implications affecting the rest of your financial life.
One of the hardest-fought debates about Social Security centers on whether you're better off claiming benefits earlier or later as you approach retirement. With the right to claim retirement benefits anytime between 62 and 70, there's a surprisingly wide set of possible outcomes. Below, we'll put hard numbers into the discussion about Social Security so you can figure out which decision makes the most sense for you.
What Social Security says about when you claim benefits
Social Security calculates your baseline benefit by looking at your earnings history over the course of a 35-year career. It takes each year's earnings, applies an inflation factor to make it comparable to current-year earnings, and then figures out the average monthly amount. If you haven't worked 35 full years, then the calculations put in extra zeros in order to make the math work.
From there, Social Security takes your average indexed monthly earnings and runs it through a formula. That gives you what's known as a primary insurance amount -- and that amount, in turn, is what you'll receive if you take your benefits at your full retirement age, which currently is between 66 and 67 years old depending on when you were born.
If you claim at a time other than full retirement age, then Social Security makes adjustments to that primary insurance amount. Specifically:
- If you claim early, then you'll lose five-ninths of 1 percent of your primary insurance amount for each month before full retirement age, up to 36 months. If you claim more than 36 months early, you'll lose five-twelfths of 1 percent for each month above 36.
- If you claim after your full retirement age, you'll get delayed retirement credits of two-thirds of 1 percent for every month you wait. The credits max out when you turn 70.
With all those fractions and percentages, it's no wonder that many people have a lot of trouble figuring out exactly how much filing early will cost them. But it's easier to understand when you use a simple example.
What filing early costs the average Social Security recipient
Every year, Social Security comes out with statistics on its program, and one of the figures you can find is the average primary insurance amount for all retired workers. For the most recent year for which data is available, that figure was $1,422.
Based on that number, here's how much filing earlier really costs the average Social Security recipient -- or how much waiting can add to check amounts:
- If your primary insurance amount matches the average and you claim early, then your monthly check will shrink by $7.90 for each month before full retirement age, up to 36 months. For instance, if you claim 12 months early, then you'll lose 12 times $7.90 or $94.80 per month, leaving you with about $1,327 for your monthly check.
- After you reach 36 months, each additional month early that you claim costs you $5.93 in monthly benefits. So for instance, say that you file 48 months early. First, you take $7.90 times 36, which gives you $284.40. Then add in 12 times $5.93, which comes out to $71.16. Add up those two figures and you get a total reduction of $355.56, which cuts your monthly check to $1,066.
- If you wait past full retirement age, your delayed retirement credits will add $9.48 to your benefit for every month you wait. For instance, wait a year past full retirement age, and you'll end up with an extra $113.76, giving you about $1,536 per month in benefits.
If your primary insurance amount is different, then the numbers above won't be right. But they should still give you a rough sense of the impact of filing early or late -- and understand that the greater your benefit, the larger the decrease or increase will be in dollar terms.
Be smart about Social Security
Only you can decide whether having more money later or less money earlier makes more financial sense from your own personal perspective. However, by having a better grasp of exactly how much money you're talking about -- rather than just generic percentage reductions and credits -- you'll be smarter in assessing your options and making the best possible choice.