As you get closer to retirement, there are many decisions you'll have to make. Whether it's deciding when to retire, where to live, or how to allocate retirement funds, these are all decisions that can affect your quality of life.
Another key retirement consideration is when to claim Social Security because it permanently affects your monthly benefit. And for millions of Americans, Social Security accounts for a good amount of their retirement income.
For a while, I thought 70 was the best age to claim Social Security because it maximizes your monthly benefit. Various studies have confirmed it's the best way to increase your lifetime benefits as well. However, waiting until 70 requires giving up many months of payments, and looking at retirement holistically, retirees should lean toward an early claim to enjoy their benefits sooner.
How your claiming age affects your Social Security benefit
Social Security benefits revolve around your full retirement age (FRA) because that's when you're eligible to receive your standard monthly benefit (called the primary insurance amount, or PIA). Social Security then adjusts your monthly benefit based on when you claim relative to your FRA.
Image source: The Motley Fool.
If you start receiving Social Security before FRA, you get less than your PIA. And if you delay past FRA, you get more than your PIA. With a FRA of 67, claiming at 62 (the earliest you can) will shave 30% off your benefit. Wait until 70, however, and you can expect a 24% boost to your benefit. Benefits do not increase beyond age 70, so there's no reason to delay your claim past that point.
It's important to see the big picture, not just your monthly benefit
The idea of increased payments is appealing, but that should only be part of your thought process. It's also worth considering your breakeven age and projected life expectancy.
In Social Security, your breakeven age is when the total lifetime benefits received from claiming at one age equals that of another age. You can compare whatever ages you're considering, but common examples would be 62 versus 67 (most people's FRA), 67 versus 70, and 62 versus 70.
To see it in action, let's consider the last scenario, 62 versus 70. At those ages, the highest possible benefits are $2,710 and $4,873, respectively.
| Monthly Benefit | Total by Age 75 | Total by Age 80 | Total by Age 81 |
|---|---|---|---|
| $2,710 | $422,760 | $585,360 | $617,880 |
| $4,873 | $292,380 | $584,760 | $643,236 |
Data source: Social Security Administration. Table by author.
In this case, the breakeven age comes slightly after 80. Until then, the total benefits you receive from claiming at 62 will be more than what you get claiming at 70, even with the substantially higher monthly benefit.
Having time to actually enjoy your benefits is important
You can really put breakeven ages into perspective when comparing them to life expectancies. Here are life expectancies at particular ages, according to the Social Security Administration:
| AGE | Men's Life Expectancy | Women's Life Expectancy |
|---|---|---|
| 62 | 81.00 | 84.07 |
| 67 | 82.63 | 85.23 |
| 70 | 83.69 | 86.00 |
Data source: Social Security Administration. Table by author.
Many will find their breakeven age is within a few years of their life expectancy, which brings us back to why I no longer believe waiting until 70 is the best choice for retirees. There are 96 months between 62 and 70 and 36 months between 67 and 70. That's a lot of missed payments for anyone delaying their claim, and they're missed payments at a time when retirees can often enjoy them the most.
There will be exceptions, but most people will find the younger they are, the more active and healthier they'll be. Finances are just one component of your retirement -- health will play a huge role in your quality of life during this time too.
If you can fully enjoy your retirement without relying on Social Security, then, by all means, delay for the higher monthly benefit. But if Social Security will make up a good portion of your retirement income, consider how much more likely you are to enjoy and utilize the benefits in the earlier years of your retirement.
