When it comes to picking the best time to claim your Social Security benefits, there's no one-size-fits-all answer. Some people take Social Security at age 62 -- the earliest age possible -- so they can enjoy their benefits while they're younger and, arguably, more active. Others delay Social Security as long as they can -- until age 70 -- to benefit from delayed retirement credits, which can add thousands of dollars per year in income.
In order to make the best decision on when to begin collecting benefits, you need to understand exactly how much delayed retirement credits are worth, and how much you'd be leaving on the table if you begin collecting Social Security early.
The cost of claiming early
Social Security is designed to pay you the same amount in lifetime benefits, regardless of when you claim. It only pays you 100% of your benefit amount if you claim at your full retirement age, which ranges between ages 66 and 67 for people born in or after 1954. If you claim earlier than that, your payment will be reduced because you'll receive more monthly checks during your lifetime. And if you claim later than that, your payment will be increased because you'll receive fewer monthly checks during your lifetime.
The reduction to benefits associated with claiming sooner than full retirement age is significant. If you claim Social Security 36 months or less prior to full retirement age, your benefit is permanently reduced by 5/9 of 1% for each month you claim early. For any month over 36 months, your benefit is further reduced by 5/12 of 1% per month. For example, if your full retirement age is 67, then claiming at age 62 will result in a benefit reduction of 30%.
That's a big haircut. But benefits can be further reduced if you claim early and plan to continue working. Claiming early exposes you to Social Security's annual earnings test, which can result in some of your benefits being withheld if your income is too high.
In 2020, Social Security will hold back $1 for every $2 earned above $18,240. A separate rule applies for the year you turn full retirement age. In the year you turn full retirement age, you can earn up to $48,600 in the months prior to your birthday, but if you earn more than that, Social Security will hold back $1 for every $3 above the limit.
Although money that's withheld is used to increase your benefit once you've attained full retirement age, Social Security's earnings test could result in you collecting a much smaller Social Security check than expected if you claim early.
Patience pays off
If you delay claiming as long as possible, then you'll benefit from Social Security's delayed retirement credits, which increases your benefit by two-thirds of 1% per month delayed up until age 70, or 8% per year.
If your full retirement age is 67 and you wait until age 70 to claim your benefits, then your patience will pay off to the tune of a monthly benefit that's 24% higher than you'd collect at full retirement age. The increased payout is even more staggering in percentage terms when you compare it to the amount you'd otherwise collect at age 62.
For example, if your full retirement age is 67 and your full retirement age benefit is $1,000 per month, then you'd receive only $700 per month if you claim at age 62. However, if you wait until age 70, you'll receive $1,240 per month, or 77% more than you'd get at age 62 (and that doesn't consider any reductions to your age 62 benefit that could result from failing Social Security's earnings test).
Clearly, waiting gives monthly budgets more wiggle room. But there's another advantage. If you live long enough, waiting might allow you to pocket more in total lifetime benefits, too. Despite missing out on eight years of checks by claiming at 70 rather than 62, you'll collect more in lifetime benefits as long as you live into your early 80s.
One more big reason why people wait
Waiting to claim until age 70 can also go a long way toward ensuring a surviving spouse's financial security.
Social Security accounts for almost half of the typical retired couple's income, but if one spouse dies, a survivor can receive only their own benefit or their survivor's benefit amount. Since they can't receive both benefits, a widow or widower could face a big drop in monthly income following a spouse's death, especially if the deceased spouse was the primary income earner.
Because a surviving spouse can collect 100% of their deceased spouse's benefit, including delayed retirement credits, waiting until 70 can put the surviving spouse in the best possible position to remain financially independent. That peace of mind alone can make waiting worthwhile.