Social Security is a major income source for millions of retired seniors. If you expect to depend heavily on those benefits during your golden years, then it's crucial that you claim them at the right time. Here, we'll help you devise a Social Security filing strategy that makes sense based on your financial needs and circumstances.

How Social Security benefits are calculated

The age at which you file for benefits will determine how much income you receive from Social Security on a monthly basis. But before we get into choosing the right age, let's understand how those benefits are calculated.

To start, the Social Security Administration (SSA) takes your average monthly earnings over your 35 highest-paid years of income, and adjusts those wages to account for inflation. If you're a higher earner, it could be the case that not all of your income counts toward your benefits calculation. That's because Social Security imposes an earnings cap on wages that changes from year to year. Currently, it's $132,900, which means that any income above that level won't influence your benefits (plus, you won't pay Social Security taxes on earnings beyond that point).

Social Security cards

IMAGE SOURCE: GETTY IMAGES.

The number the SSA comes up with is called your average indexed monthly earnings, or AIME. A formula is then applied to your AIME to arrive at your primary insurance amount, which is what your full monthly benefit will entail at full retirement age, or FRA.

FRA isn't the same for everyone. It's a function of your year of birth, as follows:

If You Were Born In:

Your Full Retirement Age is:

1943-1954

66

1955

66 and 2 months

1956

66 and 4 months

1957

66 and 6 months

1958

66 and 8 months

1959

66 and 10 months

1960 or later

67

DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.

Now here comes the tricky part: You don't have to claim Social Security at your precise FRA. The SSA allows you to file for benefits as early as age 62, but for each month you claim before reaching FRA, your monthly benefit will be reduced as follows:

  • 5/9 of 1% per month, or 6.67% a year, for the first 36 months you file before FRA
  • 5/12 of 1% per month, or 5% a year, for each additional month or year you file before FRA

Here's how that might play out. Let's imagine you're entitled to a full monthly benefit of $1,600 at an FRA of 67. Here's what you'll wind up collecting instead if you file early:

If You File at Age:

Your Benefits Will Be Reduced by This Much:

And You'll Wind Up With This Monthly Benefit:

66

6.67%

$1,493

65

13.34%

$1,386

64

20%

$1,280

63

25%

$1,200

62

30%

$1,120

TABLE BY AUTHOR.

Keep in mind that the monthly benefit you start off collecting will generally be the same amount you receive for life (not counting the yearly cost-of-living adjustments that are added to your benefits). The only exception is if you withdraw your benefits application within a year of filing and repay the SSA all of the benefits it paid you. In that case, you can file for Social Security again at a later point in time for a higher monthly benefit. But to be clear, if you file before FRA and don't undo your benefits application, those benefits won't be bumped up once you reach FRA.

There's also the option to delay benefits past FRA. In doing so, you'll accrue delayed retirement credits that raise your benefits by 2/3 of 1% for each month you file for Social Security after FRA. That comes to 8% a year. However, those credits cease to accrue once you reach age 70, which is why 70 is generally considered the latest age to claim benefits (even though the SSA certainly won't force you to file at that point).

Going back to our example of a full monthly benefit of $1,600 at an FRA of 67, here's what holding off on Social Security might do for you:

If You File at Age:

Your Benefits Will Be Increased by This Much:

And You'll Wind Up With This Monthly Benefit:

68

8%

$1,728

69

16%

$1,856

70

24%

$1,984

TABLE BY AUTHOR.

All of the above illustrates why it's so important to file for benefits at the right age. In our example, you could wind up with as little as $1,120 per month or as much as $1,984 per month in Social Security income depending on when you choose to sign up.

The right Social Security strategy for you

There are multiple factors that need to go into your Social Security filing decision. To come up with the best age for claiming benefits, answer each of these key questions carefully:

1. Do I need the money right away?

It could be the case that you lose your job later in life and struggle to find a new one, or you have a pressing need for money that your salary and savings can't address. If you need money right away and your only other options is to rack up costly credit card debt, then you may have no choice but to file for Social Security immediately. That may place you in the position of filing before FRA or filing after FRA, but at an earlier point than you'd like.

On the other hand, if you don't have an instant need for money, it often pays to hold off on taking benefits and let them continue growing. Keep in mind that if, for example, you require money for a home repair but have equity in your home, a loan or HELOC could provide you with instant access to cash at an interest rate that's affordable, thereby allowing you to leave your benefits alone. Make sure you consider all alternatives first.

2. Do I have a healthy amount of savings?

Social Security was never meant to sustain seniors in retirement by itself. If you were an average earner, those benefits will replace about 40% of your former income. Most seniors, however, need roughly double that amount to live comfortably while keeping up with their expenses. Of course, there is some wiggle room in that estimate -- if you're willing to lead a very modest lifestyle in retirement, you can possibly get by on 60% of your former income. But chances on, 40% won't cut it.

That's why it's crucial to save for retirement independently during your working years -- to bridge the gap between the amount of income you'll need and the amount Social Security will provide. And as such, the amount of savings you have, or don't have, should heavily drive your filing decision.

If you're at or near the end of your career and are extremely low on savings, to the point where you're likely to rely on Social Security as your primary source of income, then it pays to hold off on claiming benefits as long as you can. That way, you'll get more money each month.

On the other hand, if you have loads of money in your IRA or 401(k) plan, to the point where you're not at all reliant on your Social Security income to pay the bills, then to some extent, it almost doesn't matter when you file. However, you might choose to file on the early side to enjoy that extra money while you're younger. You can use it to travel, pursue hobbies, or do other things that will bring you enjoyment in your early 60s, because at that point, you're apt to have more energy than you will in your late 60s.

What's considered a healthy level of savings? Again, it depends on your personal circumstances, but as a general rule, it's a good idea to aim for 10 times your ending salary. This means that if you close out your career earning $100,00, you should, ideally, have a $1 million nest egg. Of course, you may be just fine with $850,000, or $900,000. But if you're sitting on $75,000, you should plan on growing your Social Security benefits as much as you can.

3. Am I still working?

The SSA does allow you to work and collect Social Security simultaneously. But if you do so prior to reaching FRA, you'll risk having a portion of your benefits withheld if your income exceeds a certain threshold known as the earnings test.

The limits attached to the earnings test change from year to year. Currently, you can earn up to $17,640 without having benefits withheld, but past that point, you'll have $1 in benefits withheld for every $2 you earn. If you'll be reaching FRA at any point this year, that threshold increases to $46,920, but once your earnings exceed that point, you'll have $1 in Social Security withheld for each $3 you earn.

The benefits you have withheld aren't forfeited permanently. Once you reach FRA, the amount you have withheld will be added back into your benefits for higher payments. But the reduction in benefits you face by filing early will remain in effect indefinitely unless you undo your application. It's for this reason that it often doesn't pay to claim benefits before FRA if you're still working. But to be clear, once you reach FRA, you can earn as much as you'd like without having it impact your benefits.

Of course, if you are still working when you reach FRA, and you don't need your benefits right away, holding off on filing can still make a lot of sense. Since you'll have your regular paycheck to rely on, you might as well accrue delayed retirement credits that boost your income later on.

Even if you've retired from your main job, if you have enough income between a part-time job and your retirement savings, it pays to grow your benefits. While withdrawing funds from your IRA or 401(k) could limit that account's growth in the future, remember that by delaying benefits past FRA, you're getting a guaranteed 8% boost, whereas investment returns in a retirement savings plan are never guaranteed.

4. Is my health in good shape?

The state of your health is something you must consider when deciding when to claim Social Security, and here's why: The program is technically designed to pay you the same lifetime total regardless of when you file for benefits. How can that be? Well, imagine you file at 62 when your FRA is 67. In doing so, you'll reduce your benefits by 30%, but you'll collect 60 more individual monthly payments. And on the flipside, if you delay benefits past an FRA of 67 all the way until 70, you'll boost them by 24%, but you'll collect 36 fewer payments.

In a nutshell, the program is designed to allow you to break even on a lifetime basis regardless of when you initially file, provided you live an average life expectancy. But if your health is poor, and you're unlikely to do that, then you're generally better off filing for Social Security on the early side, because while doing so will reduce your benefits on a monthly basis, you'll likely come out ahead on a lifetime basis.

Going back to our example, imagine you file at age 62 instead of 67, thereby reducing a $1,600 monthly benefit to $1,120. If you live until 78-1/2, you'll mostly break even under both scenarios -- meaning, you'll collect about the same total amount of income regardless of whether you claim benefits at 62 versus 67.

But watch what happens when you only live until 75. Suddenly, you stand to come out just over $21,000 ahead in your lifetime by claiming benefits at 62 instead of 67.

And on the flip side, if your health is great, and you're likely to live a long life, then it often pays to delay benefits as long as you can. In our example, filing for benefits at 70 rather than 67 will give you over $25,000 more in your lifetime if you wind up living until 88.

That's why you must consider the state of your health when making your filing decision, and also remember that while claiming benefits at one age or another might increase or decrease your income on a monthly basis, that won't necessarily be the case on a lifetime basis.

Of course, if your health is indeed poor, but you have the power to change it for the better, then holding off on Social Security could make sense. For example, if you're an overweight smoker who's unlikely to live a long life because of that, quitting that habit and shedding some pounds could produce a different outcome. But if you have a degenerative condition that's totally out of your hands, then filing earlier is likely a better bet for you.

5. Do I have a spouse to consider?

When you're single, you just have to take your own needs into account when filing for Social Security. But if you're married, you'll need to think about how your filing decision could impact your spouse.

For one thing, if you have a spouse who never worked, or who did work but earned a lot less money than you, then he or she may wind up relying on spousal benefits. Your spouse is entailed to receive up to half of your benefit at FRA, but your spouse also can't file for benefits until you file. Now let's say you're thinking of delaying benefits all the way until age 70, but your spouse is much older than you and wants to start getting that money sooner. The longer you wait, the more your spouse will need to wait as well.

Furthermore, if you pass away after filing for benefits, leaving your spouse behind, he or she will be entitled to survivors benefits equal to the same amount you were collecting. If you file for benefits early and reduce them in the process, your spouse will get less money for the rest of his or her life. And that's something to consider if you have a spouse who's much younger than you, or who is likely to outlive you by many years because your health is terrible and his or hers is fantastic.

What's the best age for you to claim benefits?

Clearly, there are pros and cons to filing for Social Security at different ages. If you claim benefits in your early 60s, you'll get your money sooner, but you'll reduce those benefits on what will likely be a lifetime basis. Filing past FRA will increase your benefits, but you'll need to wait longer to get them, and that could impact your ability to enjoy your golden years when you're younger and have more energy to do the things you've always dreamed of. The key, therefore, is to answer each of the above questions honestly and see where they lead you. There's no right or wrong answer on when to file, so the best you can do is make an informed decision that's rooted in a clear understanding of how Social Security works.