Most retired workers have probably heard some variation of the wisdom that there is no best age to start Social Security benefits; it is a personal decision that depends on many variables best discussed with a financial advisor. That is absolutely true. But workers nearing retirement age should still understand the stakes.
Read on to learn how claiming age impacts Social Security benefits, and to see the claiming age most likely to maximize lifetime spending power.
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Social Security benefits depend on claiming age
Social Security benefits are determined via a two-step process. The first step is to run inflation-adjusted earnings through a formula to calculate the primary insurance amount (PIA). The PIA is the retirement benefit a worker would receive if they claimed Social Security at their full retirement age (FRA).
The second step is to adjust the PIA for early or delayed retirement. Workers who claim Social Security before their FRA receive a smaller benefit, meaning they get less than 100% of their PIA. But workers who claim Social Security after their FRA receive a bigger benefit, meaning they get more than 100% of their PIA.
There are only two caveats. Eligibility begins at age 62, so workers cannot claim retirement benefits any earlier. And delayed retirement credits stop accumulating at age 70, so it never makes sense to claim any later.
The chart below shows how FRA depends on birth year, and it details the Social Security benefit (as a percentage of PIA) retired workers would receive at ages 62 and 70.
Data source: Social Security Administration. Chart by Author.
As shown above, retired workers get a much bigger benefit if they claim Social Security at age 70. But that strategy means giving up eight years of income, since they could have started Social Security at age 62.
So here is the question: Is it better to claim at age 62 and get a smaller benefit earlier in life, or to claim at age 70 and get a bigger benefit later in life?
The answer is ultimately a function of lifespan. No one knows how long they will live, so the question cannot be answered with certainty. But workers can still consider the statistical probabilities to make a more informed decision.
Most retirees would maximize benefits by claiming Social Security at age 70
The National Bureau of Economic Research published a statistical analysis earlier this year that sought to identify (1) the best age for retirees to claim Social Security benefits and (2) the extent to which maximizing or optimizing Social Security would increase lifetime discretionary spending power.
The authors concluded that virtually all workers aged 45 to 62 should claim retirement benefits after age 65, and that the vast majority should delay Social Security until age 70. The precise percentage of workers who would optimize retirement benefits at specific claiming ages is detailed below:
- Age 62: 0%
- Ages 63 to 65: 0.6%
- Ages 66 to 69: 7.8%
- Age 70: 91.6%
In the scenario above, the median household would increase their lifetime discretionary spending power by $182,370 by optimizing Social Security benefits.
Readers should be clear on one point: The authors used an analytics tool that accounted for lifespan uncertainty (among other variables), but their analysis assumed a maximum age of 100.
However, even if the maximum lifespan was set to 85 years (meaning no one would live any longer), most workers would still optimize retirement benefits by claiming Social Security at age 70, as detailed below:
- Age 62: 2.3%
- Ages 63 to 65: 2.5%
- Ages 66 to 69: 19.8%
- Age 70: 74.4%
In the scenario above, the median household would increase its lifetime spending power by $46,186 by optimizing Social Security benefits.
Here is the bottom line: Statistically speaking, among workers aged 45 to 62 that expect to live at least 85 years, the vast majority should claim Social Security after age 65, and most should delay retirement benefits until age 70 if the goal is to maximize lifetime spending power.
