Nearly 50 million seniors aged 62 and above received a Social Security benefit in the month of August. Even though the average payout to retired workers was just $1,840.27, Social Security checks are responsible for pulling more than 15 million seniors out of poverty each year, and they play a vital role in helping retirees make ends meet.
It's a similar story for future beneficiaries. Based on more than two decades of annual polling from Gallup, between 76% and 88% of nonretirees anticipate relying on their Social Security income in some capacity during retirement to pay bills or cover other expenses.
Getting the most out of Social Security is incredibly important for most future retirees -- and that all starts with understanding how your benefit is calculated, as well as how your claiming age can greatly impact what you'll receive each month.
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These four items are used to calculate your Social Security benefit
Although Social Security has its quirks (e.g., Social Security benefits may be taxable at the federal and/or state level, depending on your income), there are, when whittled down to the basics, four items responsible for determining how much you'll receive each month from America's top retirement program:
- Earnings history
- Work history
- Full retirement age
- Claiming age
The first two -- earnings history and work history -- are relatively straightforward, but do come with a caveat. Generally, the more you earn, up to the maximum taxable earnings cap in a given year, the higher your Social Security benefit will be during retirement. The "catch" is that the Social Security Administration (SSA) takes your 35 highest-earning, inflation-adjusted years into account when calculating your benefit. For every year less of 35 worked, the SSA will average in a $0, which can really drag down your monthly payout.
The third factor, your full retirement age, is determined by the year you were born. In simple terms, it represents the age you become eligible to receive 100% of your retired-worker benefit. Anyone born in or after 1960 has a full retirement age of 67.
The fourth item, which can sizably impact how much money you'll receive from Social Security, is your claiming age. Although eligible workers who've earned the requisite 40 lifetime work credits can begin receiving a Social Security check at age 62, the program encourages patience. For every year you hold off on taking your payout, beginning at age 62 and continuing through age 69, your monthly benefit can grow by up to 8%, as shown in the table.
| 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 claim benefits at age 62, 65, or 70?
As you can also see from the table, there are some mammoth differences in monthly Social Security checks between early filers and those who choose to wait. Then again, everyone's situation is going to be unique, which means there is no one-size-fits-all blueprint for when to claim benefits.
For many future retirees, ages 62, 65, and 70 may be popular claiming choices, albeit for different reasons. Here's a look at each age:
- Age 62: The lure of an age 62 claim is that you don't have to wait to begin receiving a monthly benefit check. On the other hand, claiming at the earliest possible age will lead to a permanent monthly payout reduction of up to 30%, depending on a worker's birth year. Additionally, there are an assortment of "penalties" early filers may be exposed to, including the retirement earnings test, which allows the SSA to withhold some or all of your monthly benefit, depending on your income.
- Age 65: The advantage of an age 65 claim is that your monthly payout will only be permanently reduced by 6.7% to 13.3% (not 25% to 30%) for waiting three years. It's a reasonable middle ground between being patient and wanting your money earlier than age 70. On the other hand, if you live well past age 80, an age 65 claim will almost certainly mean you've left Social Security income on the table.
- Age 70: An age 70 claim provides the highest possible monthly payout. Depending on your birth year, your check will be between 24% and 32% higher than what you'd have received at full retirement age. On the flip side, if you were to pass away prior to reaching age 80, your lifetime income from Social Security will likely be lower than if you had made an earlier claim.
Obviously, there's some guesswork involved with taking Social Security benefits. Since we can't know the eventual date of our passing, there's no way to know ahead of time if we've made the smartest decision. Nevertheless, at least one comprehensive study provides a clear analysis of which claiming age, between 62, 65, and 70, is often best for retired workers.
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Statistically, one claiming age is head and shoulders above the rest
Four years ago, online financial planning company United Income released a study that examined the claiming decisions of approximately 20,000 retired workers using the University of Michigan's Health and Retirement Study. The purpose of this analysis was simple: to extrapolate retired-worker claims to determine if they made an "optimal" choice -- i.e., the claiming age that generated the highest possible lifetime income for the individual. Keep in mind that getting the most out of Social Security may not mean having the highest possible monthly benefit.
What United Income found was that actual claiming ages and optimal claiming ages were almost perfect inverses of one another. Whereas a majority of the roughly 20,000 claimants took their payout prior to reaching full retirement age, the optimal claiming age for the vast majority would have occurred after their full retirement age.
Statistically, age 70 is far and away the most optimal claiming age. United Income found that 57% of the approximately 20,000 claimants would have gotten the most out of Social Security had they taken their payout at age 70. In fact, the four most-optimal claiming ages in United Income's analysis were, in order, 70, 67, 69, and 68. Waiting until after full retirement age would have been the correct choice for roughly four out of five retired workers.
By comparison, ages 62 and 65 were each more or less equally optimal for a mid-single-digit percentage of claimants. The only two ages 62 and 65 were superior to, with regard to generating higher lifetime income, were 63 and 64. While there are instances where an early claim makes sense, such as if you have one or more chronic illnesses that could shorten your life expectancy, the overwhelming majority of retirees are likely going to generate more lifetime income from Social Security with a claim at or after their full retirement age.
Based on this comprehensive study, waiting is going to be beneficial to seniors' wallets more often than not.
