There's no greater Social Security decision to make than when you begin collecting retirement benefits. Your choice will impact how much money you make for the rest of your life.
Some people prefer to maximize their benefits by waiting until age 70 to claim Social Security. Others opt to start as early as possible and receive their retirement benefits at age 62. But there's a big price to be paid for doing so. Here's how much greater the average Social Security benefit is at age 70 versus 62.
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How your Social Security retirement benefits are calculated
Let's first take a look at how your Social Security retirement benefits are calculated. The most important information used by the Social Security Administration (SSA) is your earnings history. The agency looks at up-to 35 years when you earned the most money.
Once SSA has this earnings history, it uses the national average wage-indexing series to index the earnings to reflect the increase in the standard of living that occurred during your career. The end product of this indexing process is your average indexed monthly earnings (AIME).
Next, SSA uses a relatively complicated formula to determine your primary insurance amount (PIA) based on your AIME. If you retire at your full retirement age (FRA), your monthly benefit will match your PIA. However, if you retire before or after your FRA, your monthly benefit will be adjusted.
SSA will reduce your monthly benefit (using your PIA as a base) by five-ninths of 1% for each month before your FRA, up to 36 months. If you begin collecting retirement benefits more than 36 months before your FRA, your benefit will be reduced by five-twelfths of 1%. If you claim Social Security at age 62 and your FRA is 67, your monthly benefit will be reduced by 30%.
If you defer collecting Social Security retirement benefits until after your FRA, you'll receive delayed retirement credits. For anyone born in 1943 or later, the credit received amounts to 8% per year through age 70. This means that if your FRA is 67, waiting until age 70 to claim Social Security will boost your monthly benefit by 24%.
Averages for the two extremes
The average monthly Social Security benefit for retired workers at age 62 is $1,274.87, according to SSA's Annual Statistical Supplement for 2023. The average monthly benefit for retired workers at age 70 is $1,963.48.
It's not surprising that there's a big gap between the two figures considering the impact of the early-retirement penalty and the delayed-retirement credits. However, there are two important things to note about these averages.
First, they were calculated based on data available in December 2022. Social Security recipients have received two cost-of-living adjustments (COLAs) since then. Average earnings also likely rose. As a result, today's average monthly benefits for ages 62 and 70 will almost certainly be higher than the averages using SSA's latest numbers.
Second, the average monthly benefit for age 70 doesn't include only individuals who waited until age 70 to collect their retirement benefits. For example, anyone who began receiving retirement benefits at age 67 three years before SSA calculated these averages would have been included in the age 70 figure. The actual average for individuals who held off until age 70 to claim Social Security, therefore, will be higher than SSA's average.
What the averages don't reflect
Because your earnings history could be quite different from the earnings of other Americans, your monthly Social Security benefits could vary quite a bit from the averages. Importantly, the averages also don't reflect other things specific to you.
In particular, the averages don't account for other sources of income you might receive. Many Americans have pensions. Others have large amounts in their IRA and 401(k) plans. Some individuals continue to work after they begin receiving Social Security retirement benefits.
The bottom line is that many factors must go into the decision of when to claim Social Security retirement benefits. The amount of the benefit itself is just one of them.
