As you're probably aware, Social Security holds a spot near and dear to many retired workers' wallets. It's responsible for providing at least half of all monthly income to 62% of current retirees and is singlehandedly lifting more than 15 million seniors out of poverty each and every month.
But one factor about the program that remains a great mystery is when to begin taking Social Security benefits. Retired-worker benefits can begin at age 62 or any point thereafter, but there are a wide range of variables that can impact when people claim benefits and what they'll be paid each month once they do.
Four factors that affect your Social Security payout
Generally speaking, there are four big factors that impact what you'll be paid from Social Security. The first two are linked at the hip: work history and earnings history. When determining your payout, the Social Security Administration takes your 35 highest-earning, inflation-adjusted years into account. Put simply, this means you'll want to earn as much as you can each year (up to the payroll tax cap in a given year) and work a minimum of 35 years if you don't want zeros averaged into your benefit calculation.
The third factor that impacts your payout is your full retirement age, which is the age when you become eligible to receive 100% of your monthly payout as determined by your birth year. Every baby boomer has a full retirement age of 66, 67, or somewhere in between, with anyone born in or after 1960 having to wait until age 67 to receive 100% of their retired worker benefit. Claim before your full retirement age and you'll be accepting a permanent reduction to your monthly payout. Conversely, claiming later than your full retirement age can lift your payout above and beyond 100%.
The fourth and final aspect that impacts your Social Security benefit is when you decide to take it. You see, your payout grows by approximately 8% for each year you hold off on taking it, beginning at age 62 and ending at age 70. Claiming as early as possible (age 62) could lead to a reduction in payouts of 25% to 30% a month, depending on your birth year.
Meanwhile, claiming as late as age 70 could increase your payout 24% to 32% above what you would have received at full retirement age (again, depending on your birth year). All things being equal, an individual claiming at age 70 could earn as much as 76% more per month than someone claiming at age 62.
But as we've examined before, picking out the ideal claiming age isn't an easy task.
This is the best age to take Social Security, study finds
However, a new study from United Income entitled "The Retirement Solution Hiding in Plain Sight" used data from the University of Michigan's Health and Retirement Study to run countless wealth and income simulations on roughly 2,000 households to determine the best possible age to claim Social Security benefits.
According to United Income, approximately $3.4 trillion in income is lost to retirees because they've made a sub-optimal claiming decision. On average, if all retiree households were to have selected the optimal claiming age, they'd have had 9% more in income during retirement (about $110,546 per household), or an average of $3,400 a year in extra income.
So what's the magic claiming age that United Income's study speaks of? Would you have guessed age 70?
After running multiple simulations and analyzing existing data, researchers found that 57% of all retirees would have collected more from the program over their lifetimes if they'd have claimed benefits at age 70. Comparatively, just 8% of retired workers would have made the optimal choice to maximize their benefits if claiming between ages 62 and 64. Interestingly enough, though, a whopping 79% of persons observed in the study claimed benefits between ages 62 and 64, with current SSA statistics finding that about 4% of all retired workers wait until age 70 to take their monthly payouts.
In other words, the optimal claiming strategy and what retirees are actually doing are completely reversed.
Of course, things aren't as cut and dried as "wait until age 70."
Here's why picking the optimal claiming strategy is so difficult
Although United Income's study found that a majority of retirees would benefit from waiting to take their payouts at age 70 or at the very least until after age 66 or 67, the results still suggest that there's no perfect claiming age or concrete path to deciding when to take benefits. After all, even though 57% of retirees would get the most out of the program by claiming their payouts at age 70, 43% would still be better off taking their benefit sooner. The problem is, it's very difficult to know which group you'd fall into until after the fact.
Arguably, the biggest hindrance to getting the most out of Social Security is that we don't know our expiration date. Don't get me wrong... I think it's a good thing that we don't, but it makes deciding when to take benefits more of a guess than we'd like it to be. For what it's worth, United Income found that just as many healthy people made sub-optimal claiming decisions as those in poor health in its study.
Perhaps the only consistency between the study's findings and existing claiming strategies is that it usually doesn't make sense for a lower-earning spouse to wait until age 70 to claim benefits. The data found that a lower-earning spouse benefits from waiting as long as possible just 35% of the time -- albeit taking benefits before age 65 only optimized the lifetime benefits of 12% of lower-earning spouses.
The point here is that everyone's "variables" differ. Whether it's your nest egg, health, marital status, need for money in the near term or long term, cost of living, or any number of factors, there still isn't a perfect guide to ensure you'll make an optimal claiming decision. But there's definitely more reason for future retirees to give the idea of waiting serious consideration following the release of this study.