You don't get a choice about whether you pay into Social Security, and you don't get to decide how much you get out of it in retirement. But you are free to choose when you'd like to apply. The government assigns everyone a full retirement age (FRA), but this is just a guideline. You can start sooner or later, and your choice will have major consequences for your lifetime benefit.
You'd think there would be quite a spread between people claiming early, claiming at their FRA, and claiming late, but that's not what the data tells us. Of the nearly 48.6 million seniors claiming Social Security as of December 2022, more than 31 million chose to claim early. Here, we'll look at why and how to decide whether this is the right choice for you.
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What happens when you claim Social Security early?
Full retirement age is anywhere from 66 to 67, depending on your birth year. Claiming before then is considered early, while claiming after that time is considered late.
Those who apply right at their FRA get what's known as their primary insurance amount (PIA). This is the amount they've earned based on the Social Security benefit formula, no more and no less.
You can claim as early as 62, and doing so will net you several years of extra checks. But there's a trade-off. Claiming retirement benefits early reduces the size of your checks as follows:
- You lose five-ninths of 1% per month for up to 36 months of early claiming.
- You lose five-twelfths of 1% per month for every additional month of early claiming beyond 36 months.
Translation: If you apply for Social Security as soon as you become eligible at 62, you'll only get 70% of your PIA per month if your FRA is 67, or 75% if your FRA is 66. So if your PIA is $2,000, you'd only get $1,400 to $1,500 per month after factoring in the penalty for early claiming.
More importantly, that benefit reduction is permanent. The government doesn't increase your benefit at your FRA (unless you had money withheld due to the earnings test). So the age you apply at is pretty significant.
Every month you wait to claim, you add a little to your checks, and that doesn't stop at your FRA. Your checks continue to increase past your FRA by two-thirds of 1% per month until you reach your maximum benefit at 70. That's 124% of your PIA if your FRA is 67 or 132% if your FRA is 66. Going back to our example of a $2,000 PIA, you could wind up with as much as $2,480 to $2,640 per month by waiting until 70 to claim.
Is early claiming right for you?
Now that you understand how your age at signup affects your benefits, the huge number of seniors claiming early might seem confusing. Does it all come down to a lack of willpower?
Not exactly. Delaying benefits increases the size of your checks, but it also means you receive fewer of them over your lifetime. So there's a trade-off there as well. Coming to the right decision for you requires you to consider these three factors:
- Your financial circumstances
- Your life expectancy
- How your decision will affect others in your household
Financial insecurity can end the debate about when to claim Social Security pretty quickly. If you're not able to work and don't have a lot of savings, claiming benefits as soon as you become eligible might be the only way to keep yourself out of debt. In that situation, early claiming is worth it, even if it means you have to settle for a smaller lifetime benefit.
For those who aren't in dire financial need, it's usually best to choose the age you believe will give you the largest lifetime benefit possible. To figure this out, create a my Social Security account to estimate your monthly benefit at various ages. Pick a few you're thinking about, and multiply each by 12 to get your estimated annual benefits. Then, multiply these results by the number of years you expect to claim Social Security. For example, a $2,000 benefit claimed for 20 years gives you an estimated lifetime benefit of $480,000.
Generally speaking, those who don't expect to live past their 70s get more money overall by claiming early. Those who think they'll live into their 80s or beyond could snag larger lifetime benefits by waiting to sign up.
Finally, if you have a spouse or dependent child who is eligible for a Social Security benefit on your work record, you must consider how your choice will affect them. Delaying Social Security might be the best move for you as an individual, but it could prevent your family members from claiming any Social Security they're entitled to, since they can't receive family benefits if you're not receiving your own retirement benefit. In this situation, it might be more advantageous to sign up a little earlier, so your household can receive multiple Social Security checks at once.
It's a big decision, but you don't have to lock yourself into anything right now. Come up with a tentative plan and adapt it as necessary over time. Then, when you think you're finally ready to apply, review all the above factors once more to ensure you are comfortable with your decision.
