For a majority of retired Americans, Social Security represents an indispensable source of income. It's responsible for pulling more than 21.7 million people out of poverty each year (close to 15.4 million of whom are seniors aged 65 and above).
Furthermore, national pollster Gallup has shown that between 80% and 90% of annually surveyed retirees rely on their monthly benefit as a "major" or "minor" source of income that helps cover their expenses.
Because of how important Social Security benefits are for current retirees, it's fair to assume that future generations will lean on America's top retirement program to make ends meet as well. This means it's imperative for future retirees to maximize what they receive from Social Security -- and that begins with understanding the variables that affect your payout.
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Four components are used to calculate your Social Security benefit
In some ways, Social Security can be a complex and quirky program. For instance, there's the potential for recipients to be taxed on a portion of their benefit at the federal and state levels. Likewise, there may be penalties associated with taking your payout early.
But when whittled down to the basics, the Social Security Administration (SSA) will rely on four components to calculate your Social Security benefit:
- Work history
- Earnings history
- Full retirement age
- Claiming age
Your work and earnings history go hand-in-hand. Put simply, the SSA will account for your 35 highest-earning, inflation-adjusted years when calculating your retired-worker benefit. If you have a higher annual wage or salary throughout your lifetime, you can, indeed, receive a larger Social Security check during retirement.
The one thing to keep in mind is that you'll be penalized if you don't work at least 35 years. For every year less than 35 worked, eligible beneficiaries will have a $0 averaged into their calculation by the SSA. If you want any shot at optimizing your Social Security benefit, you'll want to work at least 35 years.
The third factor listed above, full retirement age (also known as "normal retirement age"), describes the age a worker becomes eligible to receive 100% of their benefit and is entirely determined by birth year. Anyone born in or after 1960, which encompasses the vast majority of today's workforce, will have a full retirement age of 67.
The fourth component is the all-important one: your claiming age. Deciding when to begin receiving Social Security benefits can meaningfully alter how much you'll receive each month and during your lifetime.
While Social Security retired-worker benefits can begin at age 62, there's a built-in incentive for those who are patient. For every year a retiree waits to claim their payout, beginning at age 62 and continuing through age 69, their benefit 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 claim benefits at age 62, 66, or 70?
What makes choosing the right claiming age difficult is twofold. First, we don't know our date of "departure." Therefore, we'll never know ahead of time if we've 100% made the right choice. And second, there's no one-size-fits-all blueprint for all future retirees to follow.
Despite these drawbacks, a handful of ages in the traditional claiming-age range (62 through 70) are liable to be incredibly popular moving forward. I'm talking about ages 62, 66, and 70, each of which presents with its own advantages and drawbacks.
- Age 62: The pro of the earliest claiming age possible is getting your hands on your money without having to wait. This could be especially alluring to retirees worried about sweeping retirement benefit cuts potentially being just nine years away. On the other hand, an age 62 claim will result in an up-to 30% permanent monthly payout reduction, as well as expose early filers to an assortment of possible penalties.
- Age 66: What makes an age 66 claim so attractive is that it's in the middle of the traditional claiming-age range. Depending on your birth year, you'd receive either your full benefit or endure a relatively small permanent monthly reduction to your payout. The potential downside to an age 66 claim is that if you live well past age 80, you'll have, ultimately, left Social Security dollars on the table.
- Age 70: The plain-as-day advantage of an age 70 claim is that it'll maximize your monthly payout (24% to 32% above what you'd have received at full retirement age, depending on your birth year). But due to the unknowns of our "expiration" date, there's no guarantee age 70 claimants will live long enough to maximize their lifetime payout.
The important question is: Do any of these popular claiming ages give retired workers a better chance to optimize what they'll receive from Social Security? Believe it or not, one comprehensive study does provide a compelling answer.
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One claiming age offers retired workers their best chance to optimize Social Security benefits
Five years ago, researchers at online financial planning company United Income released a report ("The Retirement Solution Hiding in Plain Sight") that attempted to answer the age-old question of "Which Social Security claiming age is best?"
Utilizing data from the University of Michigan's Health and Retirement Study, researchers examined and extrapolated the claims data for 20,000 retired workers to determine if they'd made an optimal claim. In this sense, an "optimal" claim is one that would have produced the highest possible lifetime income for the individual. Understand that the highest possible lifetime income may not be synonymous with the highest possible monthly income.
United Income's study revealed that very few of the 20,000 claimants studied made optimal claims. Of particular interest, researchers noted that actual and optimal claims were often inverses of one another.
According to the published data, just a combined 8% of claimants at ages 62, 63, and 64 would have made an optimal claim. On the other end of the spectrum, a whopping 57% of claimants would have maximized their lifetime benefit had they waited until age 70 to begin receiving their payout. For what it's worth, age 66 was in the middle of the pack, with regard to claims optimization.
I want to be clear that this study doesn't mean everyone is going to benefit from an age-70 claim or one that occurs after their full retirement age. There are viable reasons for retirees to consider taking their payout early, such as having one or more chronic health conditions that could shorten their life expectancy.
Ultimately, every future retiree is going to have to consider their personal health, marital status, financial needs, and other factors when making their Social Security claim. What those future beneficiaries should keep in mind is that the scales are often tipped in their favor if they're patient.
