Regardless of whether you're already retired or just entering the workforce, there's a good likelihood that Social Security income will be a necessity, to some varied degree, during your retirement.
Every year for the past two decades, national pollster Gallup has surveyed both retired workers and future retirees to gauge how reliant they are, or expect to be (for future retirees), on Social Security to make ends meet. Since 2002, between 80% and 90% of surveyed retired workers have noted that their Social Security benefit represents a "major" or "minor" source of income. Similarly, between 76% and 88% of future retirees surveyed since 2001 anticipate leaning on America's top retirement program to help cover their expenses.
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Four variables are used to determine your monthly Social Security check
Looking past a couple of indirect variables that can come into play, such as the taxation of benefits and the retirement earnings test, your Social Security benefit has four direct variables that determine how much you'll be paid each month.
Two of those variables are inextricably linked at the hip: your work history and earnings history. The Social Security Administration (SSA) will take your 35 highest-earning, inflation-adjusted years into account when calculating your monthly retirement benefit. Up to a certain degree, generating more earned income (wages and salary, but not investment income) will net you a higher payout during retirement. In the event that you work fewer than 35 years, the SSA will average in a $0 for each year less than 35 worked, which ultimately drags down your payout.
The third factor that goes into determining your monthly benefit is your birth year. The year you were born is what the SSA uses to establish your full retirement age -- the age where you become eligible to receive 100% of your retired worker benefit. Everyone born in 1960 or later has a full retirement age of 67.
The fourth variable that's used to calculate your monthly benefit -- and is easily the most important -- is your claiming age. Retirees who've accumulated the requisite 40 lifetime work credits to receive a Social Security payout become eligible to receive benefits at age 62. The thing is, Social Security entices retired workers with a larger monthly payout if they wait. This benefit boost for waiting continues all the way till age 70.
This Social Security table can speak volumes about your financial well-being in retirement
Although you can't control when you're born, you do have control over when you begin taking your Social Security check. And make no mistake about it -- it's a big decision. Depending on your birth year and claiming age, your payout can be permanently reduced by as much as 30%, or perhaps increased by up to 32% above what you would have received at your full retirement age.
| Birth Year | Age 62 | Age 63 | Age 64 | Age 65 | Age 66 | Age 67 | Age 68 | Age 69 | Age 70 |
|---|---|---|---|---|---|---|---|---|---|
| 1943-1954 | 75% | 80% | 86.7% | 93.3% | 100% | 108% | 116% | 124% | 132% |
| 1955 | 74.2% | 79.2% | 85.6% | 92.2% | 98.9% | 106.7% | 114.7% | 122.7% | 130.7% |
| 1956 | 73.3% | 78.3% | 84.4% | 91.1% | 97.8% | 105.3% | 113.3% | 121.3% | 129.3% |
| 1957 | 72.5% | 77.5% | 83.3% | 90% | 96.7% | 104% | 112% | 120% | 128% |
| 1958 | 71.7% | 76.7% | 82.2% | 88.9% | 95.6% | 102.7% | 110.7% | 118.7% | 126.7% |
| 1959 | 70.8% | 75.8% | 81.1% | 87.8% | 94.4% | 101.3% | 109.3% | 117.3% | 125.3% |
| 1960 or later | 70% | 75% | 80% | 86.7% | 93.3% | 100% | 108% | 116% | 124% |
Data source: Social Security Administration.
The Social Security claiming age table you see above means everything for your retirement. Based on your birth year, it tells you exactly how much you can expect to receive each month, relative to your claiming age.
As a hypothetical example, let's assume the current average monthly benefit for retired workers in January 2023 of $1,828.30 is the baseline payout at full retirement age for persons born in 1960 or later. If an eligible beneficiary chose to begin receiving a Social Security retirement check as soon as they possibly could (age 62), their monthly payout would equate to only 70% of this $1,828.30-per-month figure, or $1,279.81. Although they'd begin receiving income immediately, they'd be forgoing $548.49 per month in income, or about $6,582 this year, relative to what they would have received each month at age 67.
Comparatively, a retired worker born in 1960 or later who waits until age 70 to claim their Social Security retirement benefit would receive a 24% boost to their check. Instead of $1,828.30 each month, they'd take home $2,267.09 monthly. For those of you keeping score at home, this variance in claiming age of 62 versus 70 leads to a nearly $1,000-per-month difference in Social Security benefits.
Image source: Getty Images.
Let me also say that deciding when to claim benefits isn't as cut-and-dried as you might think. While a higher monthly benefit sounds great on paper, everyone's financial situation is going to be unique, and it won't always make sense to wait.
As an example, if you have a chronic illness or consider yourself to be in poor health, taking your retirement benefit at an earlier age can make a lot of sense. Ultimately, you want to maximize your lifetime benefits from Social Security, and that can sometimes mean accepting a lower monthly payout.
Similarly, if your spouse generated significantly higher income throughout their time in the workforce, it can make sense as the lower-earning spouse to take your payout early in order to generate some level of income for the household. Doing so can allow the higher-earning spouse's benefit to grow over time, which will magnify the household's income during your golden years.
Taking these variables, and the above Social Security table, into account when making your claiming decision can make all the difference for your retirement.
