Claim benefits early or wait? That's the big question on a lot of seniors' minds when it comes to signing up for Social Security.
Your monthly Social Security benefit is based on your wages during your highest-paid 35 years in the labor force, and you can claim that benefit once you reach full retirement age (FRA). For anyone born in 1960 or later, FRA is 67.
You can file for Social Security as early as age 62, but for each month you claim benefits ahead of FRA, they're reduced on a permanent basis. The opposite happens if you delay your filing past FRA -- your benefits get a boost for each month you hold off.
If your FRA is 67, filing at 62 will shrink your benefits by 30%. Meanwhile, the maximum boost you can give your benefits is 24%. That's because the delayed retirement credits you'll rack up by postponing your filing beyond FRA stop accumulating once you turn 70.
All of this puts seniors in a very difficult position. Those who want their money sooner risk slashing a crucial income stream for life. Those who wait get rewarded with a higher monthly benefit risk getting less money in their lifetimes if they don't live as long as they expect to.
There's no single solution to this dilemma. So if you're not sure when to claim benefits, ask yourself these important questions.
1. What do my savings look like?
Most seniors need around 70% to 80% of their former paycheck to live comfortably. Of course, there's wiggle room with this formula, but for the most part, you should expect that you'll need the bulk of your paycheck replaced to cover your expenses and enjoy life to a reasonable degree.
Social Security, meanwhile, will replace about 40% of your pre-retirement income if you're an average earner. Now if you have a robust nest egg you're bringing with you into retirement, you may be able to afford a hit to your benefits, in which case you may feel good about filing early. But if you don't have a lot of money in an IRA or 401(k) plan, you may need to wait until FRA or even beyond to compensate.
2. How's my health?
If you don't expect to live a very long life, then claiming Social Security early could end up being a smart idea, as it could put the most amount of money in your pocket all in. Say you're entitled to a $1,500 monthly benefit at an FRA of 67. If you file at 62, you'll lose $450 a month, bringing your new benefit amount to $1,050.
That may seem like an enormous hit. But if you end up passing away at 75, that move alone will have made you almost $20,000 richer in your lifetime.
On the other hand, if your health is great and you think you'll live well into your 80s or 90s, then delaying your filing could be a smart move. In this example, waiting until age 70 to claim your benefit will increase it to $1,860. If you live until 89, you'll come out $28,000 ahead by virtue of having delayed your filing.
A tough call
When it comes to claiming Social Security, there's no right or wrong answer -- and that's what makes the decision so difficult. Your best bet is to weigh the pros and cons of filing at different ages, but also, to run through the above questions and let your answers help guide your decision.