According to two surveys conducted by national pollster Gallup this past October, Social Security is likely to play an important role in helping you make ends meet during retirement. The surveys showed that 90% of current retirees are relying on Social Security as either a "major" or "minor" source of income in retirement, and 83% of nonretirees expect to.
This data leads to one conclusion: Deciding when to begin taking your Social Security payout is incredibly important.
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Your claiming age makes a big difference on what you're paid from Social Security
As a refresher, there are more than a half-dozen factors that can actually affect what you'll take home from Social Security. Of course, some of those factors are more important than others. For instance, working a minimum of 35 years, and earning as much as you can in those years, at least up to the earnings tax cap, can help to maximize what you'll be paid by the program. If you're wondering why I chose "35 years," it's because the Social Security Administration (SSA) will take your 35 highest-earning, inflation-adjusted years into account when calculating your payout.
Your birth year is important, too, as it helps to determine when you'll reach full retirement age. Your full retirement age is the age at which the Social Security Administration deems you eligible to receive 100% of your monthly benefit. For nearly all future retirees (those born in 1960 or later), your full retirement age is 67.
And, as always, there's the age you choose to begin taking your benefit. Although benefits can begin at age 62, the program offers incentive for being patient. For each year an eligible claimant holds off on taking benefits, the eventual monthly payout grows by about 8%, up until age 70. All things being equal -- work history, earnings history, and birth year -- a retired worker claiming benefits at age 70 could net up to 76% more per month than an individual claiming as early as possible (age 62).
But the thing to remember about Social Security is that you're not only trying to maximize what you'll receive per month from the program. It's also about netting the highest lifetime income possible. For some folks that might mean claiming early, while for others a later claim could wind up being prudent.
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Here's why age 67 could be the perfect time to file for Social Security benefits
So, when should you aim to take benefits from Social Security? Keeping in mind that there's no concrete or perfect guidelines, here are five reasons age 67 (i.e., the full retirement age for more future retirees) could be the no-brainer time to begin taking your payout.
1. You're guaranteed your full monthly payout
For starters, if you wait until your full retirement age, you're going to receive no less than 100% of your due monthly benefit, based on your work and earnings history. Since more than three out of five current retirees are reliant on their benefit for at least half of their income, ensuring you receive 100% of your payout could certainly help you cover certain expenses during retirement.
Two things you'll want to keep in mind, though, are that:
- Social Security was designed to replace about 40% of the average worker's wages. This means it's not designed to be your primary source of income.
- The program is facing an estimated cash shortfall of $13.9 trillion between 2035 and 2093, according to the 2019 Board of Trustees report. What this means for you is the possibility of a future cut to retired worker benefits of up to 23%. From what little history we have, Congress has saved Social Security in the 11th hour before, but it's worthwhile to note that benefit cuts could be a little over 15 years away.
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2. You'll be protecting your spouse
A second no-brainer reason to wait until age 67 to begin taking your Social Security payout is that you may ensure the financial well-being of your spouse in doing so -- especially if you're the household breadwinner.
In addition to providing retired worker benefits, Social Security also provides long-term disability and survivor's insurance protection. The latter comes into play when a spouse passes away, leaving behind a surviving spouse or young children.
If a surviving spouse is of eligible claiming age, that person will have the opportunity to take a survivor benefit based on the deceased spouse's earnings history, or his or her own retired worker benefit -- whichever is higher. The point is, the deceased spouse's initial claiming age can determine just how large of a payout the surviving spouse can receive. By waiting until your full retirement age, you're ensuring that your spouse has the opportunity, should the spouse choose, to maximize his or her monthly survivor payout.
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3. You won't have to worry about the retirement earnings test
Maybe one of the best reasons to wait until age 67 to file for your Social Security benefit is that you won't have to deal with the dreaded retirement earnings test.
The retirement earnings test allows the SSA to withhold some, or all, of your benefits based on your annual earnings. The catch is that it's only applicable to beneficiaries who haven't yet reached their full retirement age (i.e., anyone from age 62 to 66/67). Once you've reached your full retirement age, even if you wound up claiming prior to it, the retirement earnings test no longer applies. And it's worth pointing out that you do get withheld benefits back in the form of a higher monthly payout, once you reach your full retirement age.
In 2019, the SSA can withhold $1 in benefits for every $2 in earned income above $17,640. This is applicable to those folks who won't reach their full retirement age this year. Meanwhile, the SSA can withhold $1 in benefits for every $3 in earned income above $46,920 in 2019 for those beneficiaries who will reach their full retirement age this year, but have yet to do so.
Plain and simple, waiting until age 67 avoids this mess entirely, thereby allowing you to continue working or earn side income without the possibility of withheld benefits.
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4. Working longer may lead to a larger payout
A fourth no-brainer reason to consider waiting until age 67 to take your benefit is that it might encourage you to stay in the workforce a little longer.
When you're younger, you're unlikely to have the combination of skills and experience that businesses are looking for, leading to lower annual earnings. However, over many decades in the labor force, you'll accrue skills and knowledge that companies should find valuable, resulting in a higher wage or salary. This means that if you were to wait until age 67 to file for Social Security benefits, you'd probably be able to replace lower-earning totals in your teens or twenties with higher-earning years.
Remember, the SSA is going to take your 35 highest-earning, inflation-adjusted years into account when calculating your Social Security benefit. And chances are that your highest-earning years are going to be toward the back-end of your career. Working longer and waiting to file until age 67 may ensure a modest boost in your monthly payout.
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5. Statistically, you have a better chance of optimizing your lifetime payout than claiming earlier
Lastly, the data has shown that waiting to file for your Social Security benefit gives you a better chance of optimizing your lifetime payout.
In June, United Income released a study, "The Retirement Solution Hiding in Plain Sight," that followed more than 2,000 senior households and mapped out when folks took their benefit versus when it would have been optimal to do so. The results showed an almost perfect inversion of when most people were taking benefits (ages 62 to 64) relative to when they should be taking benefits (ages 67 to 70). In fact, next to age 70, age 67 was second most likely to optimize a claimant's lifetime earnings from the program.
Obviously, it's a bit of a crapshoot knowing when to take benefits given that we (thankfully) don't know our expiration date. But statistically, the data suggests that it pays to wait more often than not.
