America's top retirement program, Social Security, is poised to play a key role during retirement for a vast majority of the roughly 167 million Americans currently in the labor force.
Based on more than two decades of annually released surveys, national pollster Gallup finds that between 80% and 90% of current retirees rely on their Social Security check as a "major" or "minor" source of income. In other words, living expenses aren't being met without this monthly payout.
Since most future retirees will lean on their Social Security benefit in some capacity to make ends meet, it makes all the sense in the world to maximize what you'll receive from the program. But in order to have any shot of doing that, you'll first need to understand how your benefit is calculated.
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The four elements that determine how much you'll be paid from Social Security
Social Security has a number of quirks that can potentially "claw back" some of the benefits you've received. Examples include the retirement earnings test, which allows the Social Security Administration (SSA) to withhold some or all of your benefits, based on how much you earn, and the taxation of benefits. That's right, Social Security can be taxable at the federal level, as well as in 12 states.
But when broken down to the basics, your Social Security benefit has four key elements:
- Earnings history
- Work history
- Full retirement age
- Claiming age
The first two factors -- earnings history and work history -- are self-explanatory, but come with a twist. The more you earn in a given year, up to the maximum taxable earnings cap ($160,200 in 2023), the greater the likelihood of receiving a bigger Social Security benefit during retirement. The "twist" is that the SSA accounts for your 35 highest-earning, inflation-adjusted years when calculating your monthly payout. This means you'll need to work a minimum of 35 years if you want any chance at maximizing what you'll receive from the program.
The third element, your full retirement age, is determined by your birth year. It represents the age you become eligible to receive 100% of your retired-worker benefit. For most beneficiaries, their full retirement age is 66, 67, or somewhere in between.
The fourth element, and the one that has the potential to really make or break your retirement, is your claiming age. Although retired workers can begin taking their payout at age 62, the program rewards patience. For every year you hold off on taking your benefit, your payout can grow by as much as 8%, as shown in the table below.
| 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.
Should you take your Social Security benefit at age 62, 66, or 70?
Deciding when to claim your benefit can have a huge effect on what you'll receive each month from Social Security.
Unfortunately, there's no perfect blueprint that encompasses everyone's unique situation (including personal health, marital status, and finances). Without a concrete blueprint, we've witnessed ages 62, 66, and 70 become popular claiming choices. All three of these ages come with their own set of advantages and disadvantages:
- Age 62: The benefit of taking your payout as early as possible is getting money in your hands quickly. If you have a chronic health condition that can shorten your life expectancy, this might make sense. However, an early claim can permanently reduce your monthly payout by 25% to 30%, as well as expose you to the aforementioned retirement earnings test.
- Age 66: Although age 66 isn't quite full retirement age for persons born in 1955 or later, it's pretty close. The advantage of waiting four years is receiving a payout that's nearly 100% of your full retired-worker benefit. On the other hand, if you live well past age 80, there's a good chance you'll have left money on the table.
- Age 70: The advantage of holding off until age 70 to take your Social Security check is that your payout will be 24% to 32% higher than what you'd have received at full retirement age, depending on your birth year. Conversely, claiming benefits at age 70 means giving up eight full years of potential collection to reap the rewards of a higher monthly payout. If you don't live into your 80s, it's also likely that an age 70 claim won't result in the highest possible lifetime payout.
The question is: Should you take your Social Security benefit at age 62, 66, or 70? Based on clear-cut data, one of these claiming ages stands head and shoulders above the rest.
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The data is crystal-clear -- one claiming age more consistently maximizes lifetime benefits
Four years ago, online investment management and financial planning company United Income released a thorough study that examined the Social Security retired-worker claims of approximately 20,000 people using data from the University of Michigan's Health and Retirement Study.
The goal of United Income's analysis was to determine how many retired-worker beneficiaries chose an optimal claiming age. In this context, "optimal" refers to a decision that resulted in the highest possible lifetime benefits from Social Security. Keep in mind that the highest lifetime benefits may not be synonymous with the highest monthly benefit.
Much of what United Income found wasn't promising. More specifically, just 4% of the 20,000 claims that were extrapolated proved optimal. This meant that most beneficiaries were, ultimately, leaving money on the table. But the claims data showed that one age would have been far more consistent than any others at optimizing lifetime benefits.
Based on United Income's crystal-clear extrapolations, claiming at age 70 would have been optimal for 57% of retired workers. By comparison, ages 66 and 62 were both optimal for a mid-single-digit percentage of claimants, with age 66 having a slight edge over age 62 claimants.
To add to the above, the four most optimal Social Security claiming ages derived from United Income's study were, in order, 70, 67, 69, and 68. More than 80% of the 20,000 claims studied would have been best off waiting until their full retirement age or later to begin receiving their Social Security benefit.
To be fair, there are hurdles to making an optimal claiming decision. For instance, you don't know the date of your passing, which is a must-have datapoint to decide what age is best to take your payout. This means there will always be some degree of guesswork involved.
Likewise, Social Security misconceptions have a way of coercing poor decision-making. For example, the belief that Social Security will go bankrupt or not be there for you when you retire has no merit. These myths have, nevertheless, encouraged a lot of retirees to claim their benefit well before their full retirement age.
For a future retiree, the smartest strategy is to weigh the factors that matter most to your unique situation (financial health, marital status, and overall health). Just keep in mind that an overwhelming percentage of retirees would have statistically generated more lifetime income from Social Security with a later claim.
