For more than two decades, national pollster Gallup has been surveying retirees and working Americans to gauge their current, or expected, reliance on Social Security income. For both groups (retirees and non-retirees), the message is clear: Social Security benefits are a virtual necessity to make ends meet.
For retired workers, up to 90% have relied on their Social Security check as a "major" or "minor" income source. Meanwhile, anywhere from 76% to as many as 88% of future retirees have noted that they expect to lean on their monthly Social Security payout to cover their expenses.
Based on these responses, getting the most out of Social Security is absolutely imperative to the financial well-being of our nation's seniors. This all starts with understanding how you're paid so you can make an optimal claiming decision.
Image source: Getty Images.
These are the four factors that most influence your Social Security payout
There are over half a dozen factors that affect how much of your Social Security benefit you'll get to keep. For example, Social Security benefits can be taxed at the federal level, as well as in 12 states, if you earn over a certain preset income threshold. Since these income thresholds haven't been adjusted for inflation since they were introduced in 1983 and 1993, a greater number of senior households than ever are paying tax on a portion of their Social Security income.
But when whittled down to the basics, there are four main factors that influence your monthly Social Security benefit:
- Work history
- Earnings history
- Full retirement age
- Claiming age
The first two factors -- work and earnings history -- go hand in hand. The more you earn, up to the maximum taxable earnings cap in a given year, the more you'll be paid each month from Social Security, assuming you've earned the 40 lifetime work credits required to receive a retired-worker benefit. The Social Security Administration takes your 35 highest-earning, inflation-adjusted years into account when determining your payout, with a $0 averaged in for each year less than 35 worked.
Your full retirement age refers to the age you become eligible to receive 100% of your retired-worker benefit, and it's entirely determined by your birth year. Most future beneficiaries have a full retirement age of 66, 67, or perhaps somewhere in between.
The fourth factor that influences your Social Security benefit is your claiming age. Deciding when to take your payout can meaningfully increase or decrease what you'll take home each month. Beginning at age 62 and continuing through age 69, your monthly benefit can grow by up to 8% annually for every year you hold off on taking it.
As shown in the table below, taking your benefit prior to reaching your full retirement age results in a permanent reduction to your monthly check of up to 30%, depending on your birth year. Meanwhile, waiting until age 70 to claim benefits can increase your Social Security check by 24% to 32%, depending on when you were born.
| 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.
Claiming benefits at this age is rarely a smart move
This leads to the all-important question: Which age/age range is the best and worst for future beneficiaries to claim Social Security benefits?
Since everyone's financial situation is unique, there isn't a concrete blueprint that tells eligible beneficiaries which age is best or worst to take their payout. But based on a study released four years ago, there's a very clear age, and age range, to potentially avoid for claiming purposes.
In 2019, online investment planning company United Income released an in-depth study that examined the claiming choices of around 20,000 retired workers using data from the University of Michigan's Health and Retirement Study. The purpose of looking at these past claims was to extrapolate whether seniors made an optimal choice. In this instance, an "optimal" claim is one that nets the individual the highest possible lifetime benefit. You'll note I've italicized "lifetime" to emphasize that it may not be synonymous with the highest possible monthly benefit.
What United Income's study showed is that patience would have paid off handsomely for most seniors. Though only a small fraction of claimants took their payout at age 70, this was the age that would have proved optimal for 57% of the approximately 20,000 persons examined. Ages 67, 69, and 68, in that order, were the next-best optimal claiming ages after 70.
On the other end of the spectrum, early claimants rarely made a smart choice. Only a combined 8% of claims made from ages 62 through 64 would have proved optimal. Worst among these is age 64, which proved optimal a little over 1% of the time.
What's particularly disheartening about this study is that Social Security claims overwhelmingly lean early. Nearly 45% of all retired-worker claims in 2021 occurred at ages 62 (29.3%), 63 (7.4%), and 64 (8%). This suggests that the vast majority of Social Security recipients are leaving money on the table.
Image source: Getty Images.
Making an "optimal" Social Security claim is difficult for two reasons
Despite studies that show waiting has a tendency to pay off for most retired workers, 65% of all Social Security beneficiaries (as of 2021) are receiving a permanently reduced monthly check -- they took their benefit before reaching their full retirement age.
This disconnect between claiming age and a potentially higher payout exists for two reasons.
First, it's impossible to know if you've made an optimal claiming decision without knowing your "end date." Since you (thankfully!) don't know the date of your passing, the best you can do is examine your personal health, financial needs, and marital status, to make an educated claiming decision. Without knowing your expiration date, there will always be some degree of guesswork involved, which is likely coercing workers into an earlier claim.
The second issue has to do with pervasive misunderstandings and misconceptions concerning the Social Security program that cause retirees to take their payout early.
For the past 39 years, the Social Security Board of Trustees Report has cautioned that the program's long-term (75-year) revenue collection wouldn't be sufficient to cover its outlays (benefits and administrative expenses). In short, Social Security is facing a long-term funding obligation shortfall, and the trust responsible for paying retired-worker benefits may need to reduce monthly payouts by up to 23% in 10 years in order to sustain payouts for future generations.
Despite what you might have read on the internet, Social Security isn't insolvent and is in absolutely no danger of bankruptcy. In fact, since more than 90% of its revenue derives from the 12.4% payroll tax on earned income, it'll be able to give benefits to eligible beneficiaries in perpetuity, as long as Congress doesn't change how the program is funded. Taking benefits early due to the belief that Social Security won't be around when you retire appears to be costing retirees a lot of money.
While there's never going to be a perfect blueprint that outlines when to take your Social Security benefit, the data is pretty clear that waiting is going to work for most retirees. It's something to take into strong consideration when it comes time to weigh your options.
