In June 2023, the average retired worker brought home a Social Security benefit of $1,837.29, which annualizes to just over $22,000 per year. While this might not sound like a lot of money, it's enough to keep close to 15.4 million adults aged 65 and over out of poverty each year.
Social Security income is vital for the vast majority of the program's more than 49 million retired-worker beneficiaries to make ends meet. This will likely also hold true for the well over 100 million working Americans who'll eventually receive a Social Security benefit.
In other words, getting the most out of Social Security is of the utmost importance to retirees -- and it all starts with an understanding of how your benefit is calculated.
Image source: Getty Images.
Four factors are used to calculate your Social Security benefit
There are more than a half-dozen factors that come into play which determine how much you'll be paid each month from Social Security, as well as how much of your benefit you'll get to keep. For instance, Social Security benefits can be taxable at the federal level and in 12 states, depending on how much you earn in a given year.
But when boiled down, just four elements are used to calculate how much you'll be paid by Social Security each month during retirement: earnings history, work history, full retirement age, and claiming age.
The first two factors, your earnings history and work history, are interwoven. The Social Security Administration takes into account your 35 highest-earning, inflation-adjusted years when calculating your monthly retired-worker payout. A $0 is averaged in for every year less of 35 worked. Thus, it's imperative to not only earn as much as you can when you work, but to also work a minimum of 35 years if you have any hope of maximizing your Social Security check.
The third element is your full retirement age, which is determined by your birth year. Using the retirement age chart, you can quickly determine what age you'd need to wait till before receiving 100% of your retirement benefit. For instance, anyone born in 1960 or later has a full retirement age of 67.
The fourth factor, and the one that can have the biggest impact on what you'll be paid each month by Social Security, is your claiming age. Although eligible retired workers have the option of taking their benefit as early as age 62, they're incented to be patient. For every year an individual waits to claim their Social Security retired-worker benefit, their payout can increase by up to 8%, through age 69.
As you can see from the table, an early claim can result in a permanent monthly payout reduction of 25% to 30%, depending on your birth year, while waiting until age 70 can lift your benefit by 24% to 32% above what you would have received at 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.
This is, hands down, the best age to claim Social Security
The million-dollar question is: Which age is best to claim Social Security benefits?
In 2021, close to 3.2 million eligible beneficiaries took the plunge and began receiving their Social Security payout. If we exclude workers with disabilities who were automatically converted to retired workers at their full retirement age (66 years and 10 months in 2021), the percentage breakdown of claiming ages in 2021 was as follows:
- Age 62: 29.3%
- Age 63: 7.4%
- Age 64: 8%
- Age 65: 12.7%
- Age 66: 24.7%
- Age 67: 3.9%
- Age 68: 2.3%
- Age 69: 2.1%
- Age 70 (or above): 9.6%
You'll note that the earliest claiming age possible (62) was far and away the most popular. Additionally, a lot of beneficiaries began receiving their payout in the age 65-66 range. According to Social Security's 2022 Annual Statistical Supplement, 65% of the 47.29 million retired workers receiving a benefit in 2021 had claimed their payout prior to reaching their full retirement age.
However, a study conducted by online financial planning company United Income suggests many of these retirees have made a poor choice.
In 2019, United Income released a report that analyzed and extrapolated the claiming decisions of approximately 20,000 retired workers using data found in the University of Michigan's Health and Retirement Study. Put simply, United Income looked at each claiming decision to see if it was optimal -- i.e., if the individual made the choice that resulted in the highest lifetime (key word!) benefit payout.
What United Income found was an almost perfect inversion between when retirees were claiming their benefits and the age where an optimal claim would have been made. For example, just 6.5% of aggregate claimants at ages 62 and 63 made an optimal decision, according to the report. Yet in 2021, close to 37% of all claims were taken at these two ages.
Meanwhile, United Income found that age 70 stood out as the hands-down best age to claim Social Security benefits. Based on its extrapolation, 57% of all claimants would have made an optimal decision by waiting until age 70 to begin receiving a Social Security check. The next-closest "best" age was 67, which was optimal for around 10% of claimants.
Image source: Getty Images.
There is no concrete blueprint when it comes to taking Social Security benefits
Statistically speaking, age 70 is the best age to claim Social Security benefits -- and it's not even close. Yet we continue to see a relatively small percentage of claimants willing to wait until age 70 to take their payout. What gives?
One possible reason so many seniors choose to take their payout prior to reaching full retirement age is the ongoing misconception that Social Security could become insolvent or fail to pay benefits. Although Social Security's annual Trustees Report has outlined a growing funding obligation deficit for nearly four decades, the program is incapable of going bankrupt or becoming insolvent. Being coerced into an early claim by inaccurate information could be costing retirees thousands of dollars in annual Social Security income.
Secondly, we don't have all the information needed to make a decision we know is 100% correct. The only way to know if you've made an optimal claiming decision is to know the date you'll pass on. Frankly, that's a piece of information I'm glad not to know, and I'd venture a guess that most people feel the same way. But without knowing your "end" date, there is no concrete blueprint to ensure you've made an optimal claiming decision.
To maximize what you'll receive from Social Security during your lifetime, you'll want to take your health, marital status, and financial situation into consideration. You'll note that, in aggregate, these factors are going to be different for everyone.
While there are instances where an early claim will make perfect sense, such as if you have a chronic illness or were a lifetime low-earning spouse, the data is pretty clear that waiting is going to be a smart choice for most future retired-worker beneficiaries.
