The great majority of Americans depend on Social Security to some degree during their golden years. In fact, 40% of retired workers get more than half of their income from Social Security benefits, and 13% are entirely dependent on the program. Suffice it to say, Social Security is an indispensible source of financial well-being in later life, so current workers should do everything in their power to maximize their benefit payments.
With that in mind, two variables affect the size of the Social Security benefit paid to retired workers: lifetime earnings and age. The more money someone makes during their lifetime and the longer they wait to claim retirement benefits (up to age 70), the bigger their Social Security payments will be. Of course, workers have more control over the second variable, which raises the question: What is the best age to start Social Security?
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Most retired workers start Social Security too early
Workers are eligible for Social Security retirement benefits at age 62, but they are not entitled to their full payment, also called the primary insurance amount or PIA, until they reach full retirement age (FRA). Workers who start collecting Social Security before their FRA get a smaller benefit for life, meaning a permanent reduction is applied to their PIA.
Nevertheless, more than half of the 3.4 million new beneficiaries in 2022 were under FRA, meaning they started Social Security benefits early despite the downside of a permanent reduction. And roughly one-quarter of new beneficiaries were exactly 62 years old, so they received the biggest benefit reduction possible -- 30% of the PIA for anyone born in 1960 or later.
A recent study from the National Bureau of Economic Research (NBER) suggests many of those individuals made a grave miscalculation. While starting benefits before FRA means more years of Social Security income, it typically does not mean more lifetime spending power.
Most retired workers should start Social Security at age 70
The NBER recently conducted a study to assess the cost of failing to maximize lifetime Social Security benefits. The researchers used a program that considered cash-flow constraints, lifespan uncertainty, and all federal and state tax programs to identify the optimal age to start Social Security, and the results suggest that most retired workers are leaving a lot of money on the table.
According to the NBER, nearly all workers aged 45 to 62 should wait until age 65 to start retirement benefits, and more than 90% should delay until age 70. Indeed, the median increase in lifetime discretionary spending (LDS) for workers who wait until age 70 is estimated to be $182,370 (or 10.2%).
Similarly, workers in the 25th and 75th percentiles would see LDS increases of $69,493 (or 3.2%) and $289,893 (or 17.2%), respectively. In other words, 75% of workers would boost their lifetime spending power by more than $69,493, and 25% would boost their lifetime spending power by more than $289,893 by delaying benefits until age 70.
Here's the bottom line: The NBER study indicates that virtually all workers aged 45 to 62 should wait until age 65 to start Social Security, and most workers should wait until age 70. Doing so could have a material impact on their financial well-being. That said, the study results are irrelevant to individuals with a shorter-than-average life expectancy, and it's never a bad idea to get a second opinion in any case.
Social Security strategy calculators can help
Anyone can estimate their PIA by creating an account with the Social Security Administration (SSA). That PIA can then be plugged into the Social Security strategy calculator Open Social Security to estimate the claiming age that would maximize lifetime benefits based on individual circumstances.
The Open Social Security calculator automatically considers mortality data from the SSA in making its recommendation, though it can be adjusted to consider other scenarios. It also shows the total lifetime benefit a person could expect at every possible claiming age (i.e., each month between age 62 and 70), which is valuable in understanding how the decision to start Social Security earlier or later could impact income in retirement.
