Whether you realize it or not, Social Security plays a very important role in helping seniors make ends meet during retirement. According to an October survey from national pollster Gallup, 90% of seniors lean on their guaranteed payout to some degree each month, with 57% of survey takers noting that it's a "major" source of income.
Long story short, what you receive from Social Security each month can have a notable impact on your financial health -- and this all starts with deciding when to begin taking your payout.
There are a lot of variables that determine your Social Security benefit
As you might already be aware, there are more than a half-dozen factors that can ultimately determine how much of your Social Security monthly benefit you'll receive or get to keep. Among these factors, four really stand out.
The first two, your work history and earnings history, are inextricably tied at the hip. The Social Security Administration winds up taking your 35 highest-earning, inflation-adjusted years into account when calculating your benefit at full retirement age. This means earning as much as you can each year, as well as working for 35 years, if not longer, is imperative if you want to maximize what you'll receive from the program.
A third important factor is your birth year, which is what determines your full retirement age -- i.e., the age at which you become eligible to receive 100% of your payout. Claiming benefits at any point prior to hitting your full retirement age means accepting a permanent reduction to your monthly payout. Likewise, beginning benefits after your full retirement age can boost your take-home above and beyond 100%.
Lastly, but perhaps most importantly, your claiming age matters. That's because the Social Security Administration incents patience. Beginning at age 62, for every year you hold off on taking your payout, it'll grow by up to 8%, up until age 70. Thus, all factors mentioned above being equal, an individual taking their payout at age 70 may net as much as 76% more per month than the same individual taking their payout as early as possible (age 62).
Three disadvantages of taking Social Security at 70
While the data shows that age 70 is the best age to claim Social Security for a majority of folks, it's still not for everyone, and it does have its drawbacks. Here are three reasons taking benefits at age 70 can be a risky proposition.
1. Longevity uncertainty
To begin with, none of us (thankfully) knows our expiration date. The downside, though, is that not knowing how long we'll live will always make our claiming decision uncertain.
You see, regardless of whether we begin taking our payout at age 62, 70, or any other point in between these two ages, the lifetime benefits paid out by the program tend to be equal right around ages 78 to 80. If you wind up living longer than, say, age 80, waiting will have proved to be the prudent choice. However, if you don't live to see age 78, then maximizing your monthly payout by waiting until age 70 will actually result in a lower lifetime payout than if you had claimed earlier. And getting the most out of Social Security over your lifetime, not necessarily per month, should be the goal.
The other factor to consider here is that if you wait until age 70 to begin receiving your monthly benefit, you might soon be too old to enjoy the added monthly income. By "enjoy," I mean utilizing this extra cash to travel or delve into hobbies that might interest you during your golden years.
2. Financial uncertainty
Next, claimants who choose to wait until age 70 in order to maximize their monthly payout will also have to find a way to cover eight years' worth of expenses. Whereas early claimants are accepting a potentially steep monthly reduction to their payout, they'll be receiving a benefit for up to eight years before folks at age 70 receive a dime from Social Security.
For instance, claiming early may allow Social Security beneficiaries to invest their payout into the stock market, which has historically returned about 7% per year, inclusive of dividend reinvestment and when adjusted for inflation. You'll note that this historic return rate is lower than the maximum monthly increase of 8% per year for waiting to claim Social Security, but a savvy investor may be able to deliver market-topping returns, even by taking a permanent reduction to their payout.
Even with the retirement earnings test potentially coming into play, a modestly earlier claim might also help seniors pay off their debts earlier.
Thus, waiting until age 70 to take Social Security does leave some degree of financial uncertainty on the table for eligible recipients.
3. Program uncertainty
Another potential drawback of waiting until age 70 to begin receiving your Social Security payout is that the program isn't on the best footing.
The silver lining for retired workers and future generations of retirees is that the program is in absolutely no danger of going bankrupt. No matter when you retire, Social Security will be there to provide you a retired worker benefit, as long as you're eligible to receive one.
The downside, according to the latest Social Security Board of Trustees report, is that the program may exhaust its nearly $2.9 trillion in asset reserves by 2035, at which point a 23% across-the-board cut to retired worker benefits may be needed to sustain payouts through 2093. Therefore, if you're late-born baby boomer who chooses to wait until age 70 to begin taking your Social Security payout, you could be hit soon after with an across-the-board benefit cut designed to preserve the program.
No one ever said that deciding when to take your Social Security payout was going to be easy. Just know that there are potential drawbacks to claiming benefits at any age -- even the age where a majority of recipients would benefit most.