In November, 50 million retired workers brought home an average Social Security benefit of $1,845. While the average retirement check may not sound like a lot, it's responsible for pulling close to 15.4 million adults aged 65 and over out of poverty each year.
Considering that most retirees lean on their Social Security benefit, in some capacity, to make ends meet, it's imperative for generations of future retirees to get as much as they can out of America's top retirement program. But for that to happen, future beneficiaries need to understand the dynamics of how their benefit is calculated, and how much their claiming decision can affect what they'll receive on a monthly and/or lifetime basis.
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Here's the four-part "recipe" used to calculate your Social Security benefit
Though there are some interesting quirks to the Social Security program -- such as the possibility of being taxed on a percentage of your payout at the federal level, as well as in 10 states -- there are only four factors the Social Security Administration (SSA) takes into consideration when calculating your payout:
- Earnings history
- Work history
- Full retirement age
- Claiming age
The first two "ingredients" go hand in hand. In theory, the more you earn, on average, over your lifetime, the higher your potential retired-worker benefit. The SSA will account for your 35 highest-earning, inflation-adjusted years when calculating your retirement check. Just keep in mind that for every year less than 35 worked, the SSA will average a $0 into the calculation. If you want any chance at maximizing what you'll receive from America's top retirement program, you'll want to work a minimum of 35 years.
The third item, "full retirement age" (FRA), refers to the age at which you become eligible to receive 100% of your retired-worker benefit. It's entirely determined by the year you're born, with much of today's labor force having a FRA of 67.
The all-important fourth factor the SSA uses to calculate your Social Security check is your claiming age. Although eligible beneficiaries can begin receiving their retired-worker benefit as soon as they turn 62, the program very clearly incentivizes workers to wait to claim their payout. For every year a worker waits to take their benefit, beginning at age 62 and continuing through age 69, their payout can grow by up to 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 claim benefits at age 62, 66, 67, or 70?
If the aforementioned average monthly retired-worker benefit of $1,845 is assumed to be the payout at FRA, an age 62 claim from a worker born in or after 1960 could result in a permanent monthly reduction of up to 30%. Meanwhile, an age 70 claim from the same worker could lead to a 24% boost from what they would have received at FRA. In nominal-dollar terms, this eight-year claiming age difference equates to almost $1,000 per month.
What makes Social Security claiming decisions so difficult is that there's no one-size-fits-all blueprint. Everyone's situation is going to be unique, which is why ages 62, 66, 67, and 70 are all likely to be popular claiming choices moving forward. Each of these claiming ages comes with its own set of pros and cons.
- Age 62: The lure of an age 62 claim is being able to get your hands on your benefit as soon as you're eligible. This could be an especially attractive option for those worried about potential benefit cuts nine years from now. However, claiming benefits at age 62 could result in an up to 30% permanent reduction in your monthly payout, and expose you to the retirement earnings test, which allows the SSA to withhold some or all of your benefit, based on your income.
- Age 66: What makes age 66 so attractive is that it's the literal middle ground of the traditional claiming-age range (62 through 70). Waiting four years to begin receiving benefits can minimize or eliminate any permanent payout reduction, depending on your birth year. But for those born in 1960 or later, it ensures a modest permanent reduction to their payout and could still expose beneficiaries to the retirement earnings test.
- Age 67: For a majority of today's workforce, age 67 represents FRA. Thus, an age 67 claim ensures that you'll receive, at minimum, 100% of what you're due in monthly retired-worker benefits. The downside of an age 67 claim is that you'll be leaving Social Security dollars on the table if you live well into your 80s.
- Age 70: The hook of an age 70 claim is that you'll receive the highest possible monthly benefit (anywhere from 24% to 32% above what you'd have received at FRA, depending on your birth year). The flipside is that there's no guarantee you'll live long enough to also maximize your lifetime income from the program.
With benefits and advantages for each of these four claiming ages, the all-important question is: Which one offers the best chance at maximizing lifetime payouts? A comprehensive study released in 2019 appears to offer a huge clue.
Image source: Getty Images.
Statistically speaking, one claiming age is better than the rest
Five years ago, online financial planning company United Income released a report ("The Retirement Solution Hiding in Plain Sight") that analyzed and extrapolated the claiming decisions of 20,000 retired workers using data from the University of Michigan's Health and Retirement Study.
The goal for researchers was to determine if, in hindsight, retired workers had made an optimal claiming decision. For United Income, "optimal" refers to a decision that maximized what a retiree received over their lifetime, and not necessarily on a monthly basis.
United Income's deep dive found a marked inversion between actual claims and optimal claims. While most of the 20,000 retired workers chose to begin receiving their monthly check prior to reaching their FRA, an overwhelming percentage of optimal claims would have occurred at or after FRA.
More specifically, an extrapolation of claims data found that only 8% of the 20,000 claims studied would have been optimal at ages 62, 63, and 64, on a combined basis! In fact, the four earliest claiming ages (62 through 65) collectively produced the lowest likelihood of an optimal claim.
In comparison, United Income's researchers found that 57% of retired workers would have generated the maximum lifetime income if they'd waited until age 70 to begin receiving their monthly check. For those curious, age 67 offered the second-highest probability (around 10%) of an optimal claim, with age 66 ranking fifth, behind ages 70, 67, 69, and 68 (in that order).
Since none of us knows our "departure" date, you'll never know ahead of time if you've made an optimal claiming choice. The best you can do is account for your personal health, marital status, and financial needs when deciding which age is best to begin receiving retired-worker benefits. This means an early claim may be best for some workers.
But when comprehensively examined across a broad base of former claimants, history suggests that waiting is going to prove beneficial to most future retirees.
