We're tasked with making a number of big decisions throughout our lifetimes, but perhaps none is as important as deciding when to begin taking Social Security benefits.
Today, more than 63 million people, of which roughly 7 out of 10 are retired workers, receive a Social Security benefit each month. Of these retirees, 62% lean on their monthly payout to account for at least half of their income, and an estimated 15.3 million are lifted out of poverty each month as a result of their Social Security stipend. Suffice it to say, the data suggests more seniors than not will lean on their payout, at least in some capacity, to make ends meet.
But deciding when to begin that payment is the hard part. While there are suggestions that can aid in the decision-making process, there's no one-size-fits-all guide for when a person should begin taking their benefit.
Yet for baby boomers and Generation Xers -- especially those born in the latter half of the boom and early part of Gen X -- their choice might be simple: Claim early, at age 62.
Before I get into the plain-as-day reason why age 62 might be the smartest claiming age for these late-born boomers and early-born Gen Xers, let me begin with a disclaimer: No two situations are alike. Everyone's financial, marital, and health situations differ when examined as a whole, which means that no broad-based idea will ever encapsulate the best claiming scenario for everyone. You'll need to sit down and decide how these various factors affect you when making your claiming decision.
With that being said, let's get to the topic at hand: Filing for benefits at age 62.
Claiming benefits early is often discouraged
The general reason claiming benefits as early as possible for a retired worker is discouraged is because it means a remaining lifetime of permanently reduced monthly payouts. A retired worker will receive 100% of their monthly payout when reaching their full retirement age, which for most folks will be age 66, 67, or somewhere in between. This means that claiming at any age prior to your full retirement age will result in a permanently reduced payout. This reduction, depending on your birth year, could be as much as 25% to 30%.
The trade-off for a big reduction in your monthly payout is that you'll begin receiving money sooner than the folks who choose to wait longer to receive their benefits. Sure, all things being equal -- work history, earnings history, and birth year -- a person claiming at age 70 can earn up to 76% more per month than a person claiming at age 62. But that individual at age 62 will be netting a check from the Social Security Administration for eight years before the 70-year-old claimant even sees a dime.
Generally speaking, the thesis has been that if you're in excellent health and expect to live longer than age 80, waiting until after your full retirement age to take benefits will net you the highest amount of lifetime benefits. Meanwhile, if you're in poor health, claiming early is your best bet.
But there's an even bigger reason why late-born boomers and early-born Gen Xers may want to consider taking their benefits early, and it has little to do with their health. Rather, it has to do with a lack of progress in fixing Social Security's imminent cash shortfall at the federal level.
Across-the-board benefit cuts may be in Social Security's future
According to the latest Social Security Board of Trustees report, released in early April, the program is expected to hit an inflection point in 2020 that sees it expend more than it collects for the first time since 1982. This net cash outflow, while small in 2020, is expected to grow with each subsequent year, leading to a complete exhaustion of the program's $2.9 trillion in asset reserves by 2035.
To make sense of the previous statement, this doesn't mean that Social Security is going bankrupt or is insolvent. In fact, this couldn't be further from the truth. Social Security's recurring sources of revenue -- the 12.4% payroll tax on earned income and the taxation of benefits -- ensure that it can never go bankrupt, short of Congress completely changing how the program is funded. No matter when you retire, as long as you've earned enough lifetime credits to receive a retired worker benefit, you'll be receiving a payout from the program.
It does, however, signify that the existing payout schedule is not sustainable. The Trustees report estimates that the program will currently be short $13.9 trillion between 2035 and 2093, assuming the existing payout schedule, including cost-of-living adjustments, were to continue. Without a big infusion of revenue or serious expenditure cuts, the report calls for an up-to-23% benefit cut to retired workers by 2035 to sustain payouts through 2093.
The best reason for boomers and Gen Xers to claim early
This is where the claim-early strategy may come in handy. If you have little faith in Congress to enact a fix to Social Security and fully expect a benefit cut at some point in the future, then claiming early, even at a reduced rate, will allow a beneficiary a greater chance to maximize their lifetime payout.
Think about this for a moment. If you were born in 1964, the last year of the baby boomer generation, you could begin taking benefits in 2026 at age 62 or any point thereafter, with monthly benefits being maximized at age 70 in 2034. Sure, waiting until your full retirement age (67) in 2031 or even maxing out your payout in 2034 could net 100% or up to 124% of your monthly payout.
But keep in mind that a 23% across-the-board benefits cut may await in 2035. Thus, the individual who decides to claim at age 62 will get nine full years of payouts that, while permanently reduced, aren't impacted by a possible across-the-board cut (until 2035), whereas those folks who wait could almost immediately get a 23% haircut to their payout for their patience.
Understandably, this strategy is founded on two pretty substantial uncertainties:
- We don't know our own expiration date and therefore can never know if we've made the best possible claiming decision.
- We don't know what Congress will do.
Our only source of precedence on the lawmaking front comes from 1983, which was the last time Congress passed a bipartisan overhaul of Social Security in order to strengthen the program. Had lawmakers not acted in 1983, the program's asset reserves would have run out within a matter of months.
In other words, betting on politicians to bail out retired workers via Social Security is a dicey proposition at best, which is why late-born boomers and early-born Gen Xers may benefit from claiming early and generating as many monthly payouts as possible before an across-the-board reduction is enacted.