There's little denying the importance of Social Security for retired workers. According to a recent survey from Gallup, 57% of current retirees lean on their retirement benefits as a "major" source of income, with 90% needing their payouts in some capacity to make ends meet. Furthermore, this benefit is singlehandedly responsible for pulling in excess of 15 million retirees out of poverty every year.
These data points all lead back to one core fact: Deciding when to take Social Security is the most important decision seniors will make.
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What goes into determining your Social Security benefit?
Ultimately, there are more than a half-dozen factors that go into determining how much you'll be paid by the program during retirement and how much of that payout you'll be able to keep. But four factors stand head and shoulders above the rest in determining your benefit.
The first two are your work and earnings histories, which are inextricably linked. When determining your payout at full retirement age (I'll touch on the topic of full retirement age in a moment), the Social Security Administration (SSA) accounts for your 35 highest-earning, inflation-adjusted years. Therefore, it's in your best interest to work at least 35 years, if not longer, and earn as much as you can, in order to boost your eventual payout. For each year less of 35 worked, a $0 is averaged in by the SSA.
The third important factor is your full retirement age, which is the age you become eligible to collect 100% of your monthly payout, as determined by your birth year. Most Americans have a full retirement age of 66, 67, or somewhere in between. What you should know is that if you take your payout prior to reaching your full retirement age, you'll be accepting a permanent reduction to your monthly benefit. Likewise, if you wait until after your full retirement age to begin receiving your benefit, it'll be permanently higher.
The fourth and final important factor, as noted above, is your claiming age. Although retired worker benefit distributions can begin as early as age 62, the program incents patience. For every year an eligible beneficiary holds off on taking their payout, it can grow by as much as 8%, up until age 70.
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Here's how much extra you could net by waiting
But the big question is, how much extra would you really get if you decided to wait to take your benefit? Although the answer is going to depend on your unique work history, earnings history, and birth year, assumptions can certainly be made by utilizing the average retired-worker payout.
According to the Social Security Administration's Fact Sheet, the estimated average retired-worker payout in December, prior to the implementation of the 1.6% cost-of-living adjustment, was $1,479. Doing a little bit of rounding, this means that the average retired worker should be netting approximately $1,503 this month (January 2020). For the sake of argument and simplicity, let's use this figure as our baseline.
For people born between 1943 and 1954 (i.e., a full retirement age of 66), waiting until age 70 means receiving 32% more per month than what they would have at full retirement age. Based on the average retired worker payout of $1,503, which we're using as our arbitrary baseline, this works out to an extra $481 per month, or $5,772 per year.
At the other end of the spectrum are those folks born in 1960 or later, who therefore have a full retirement age of 67. These future retirees can net up to a 24% maximum increase by waiting to take their payout at age 70. This works out to almost $361 extra each month, or about $4,329 more per year.
Although this might not seem like a lot of extra income, keep in mind that the average beneficiary who makes it to age 65 will receive a Social Security payout for 20 additional years. In other words, this extra income for being patient adds up quickly.
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Waiting isn't appropriate for everyone (but it is for most people)
However, you should also understand that waiting isn't going to be the best solution for everyone. By "best solution," I mean the optimal age where they'll collect the most lifetime income from the program.
For example, an eligible retired worker who has one or more chronic health conditions may not live to see age 70 or long thereafter. Though our expiration date remains (thankfully) unknown, our health can certainly play a role in our claiming decisions. Someone with myriad health problems would probably be best served by taking their payout early, even with a permanent monthly reduction, in order to maximize what they'll receive from the program during their lifetime.
Additionally, some seniors may not have other sources of income should they become unemployed, making an early Social Security claim a logical decision.
But according to a report from United Income, whether most seniors realize it or not, waiting is probably in their best interest. After tracking 2,000 senior households, the report found that 57% of retirees would have gotten the most out of Social Security by taking their payouts at age 70. In aggregate, more than 4 out of 5 retired workers optimized their lifetime benefits by claiming between ages 67 and 70. Meanwhile, just 6.5% of retired workers optimized their lifetime benefits by beginning their payouts between ages 62 and 65.
Statistically, waiting has shown to be a smarter move. Nevertheless, retired workers will need to take the time to assess their health and financial status before ultimately deciding what claiming age is best for them.
