Attention, Retirees: This Social Security Decision Could Add 77% to Your Monthly Benefit Check

For millions of Americans, Social Security is a critical source of financial support during the golden years of life. In fact, nearly 90% of retired workers depend on benefits to some degree, and 60% see Social Security as a "major source" of income, according to Gallup.

Yet, academic research has consistently found that people shortchange themselves by claiming Social Security too early. For instance, a 2019 study from United Income concluded most people would optimize their lifetime income by claiming benefits at age 70, but only 4% of people make the financially optimal decision.

The consequence is significant: The average household loses about $111,000 in lifetime retirement income because they make suboptimal claiming decisions. Put differently, the average retiree could increase their retirement income 9% by selecting the most appropriate claiming age.

To be clear, 70 is not the most appropriate age for everyone, and claiming decisions should be made with help from a financial advisor if possible. But every retiree should understand how claiming later could increase their monthly benefit.

Here's one Social Security tip that could add up to 77% to your monthly benefit check.

Image source: Getty Images.

How Social Security benefits are determined for retirees

Social Security benefits for retirees are based on lifetime income, but the final payout is revised up or down depending on claiming age.

Specifically, a formula is applied to the inflation-adjusted income from the 35 highest-paid years of worker's career to find their primary insurance amount (PIA). The PIA is the benefit a worker will receive if they claim Social Security at full retirement age (FRA), which is 67 for anyone born in 1960 or later.

Covered workers can claim retirement benefits as early as 62, whether or not they are still in the workforce. However, anyone that starts Social Security before FRA receives a smaller payout, meaning their benefit equals less than 100% of their PIA. Alternatively, anyone that starts Social Security after FRA receives a bigger payout, meaning their benefit equals more than 100% of their PIA.

There is one important qualification to those rules. No one should ever start Social Security later than 70 years old because delayed retirement credits stop accumulating at that age.

Retirees can increase their benefit 77% by claiming Social Security at age 70

Retired workers should have a clear understanding of how age-based benefit reductions and increases are calculated.

• Early retirement: Workers that start Social Security early have their benefit reduced by five-ninths of one percent for each month before FRA, up to 36 months. The benefit is further reduced by five-twelfths of one percent thereafter.

Based on the information above, someone that starts Social Security five years before FRA would have their benefit reduced by 30% -- that is, five-ninths of one percent multiplied by 36 months, plus five-twelfths of one percent multiplied by 24 months.

• Late retirement: Workers that start Social Security late have their benefit increased by two-thirds of one percent per month after reaching FRA, but delayed retirement credits stop accumulating at age 70.

Based on the information above, someone that starts Social Security three years after FRA would have their benefit increased by 24% -- that is, two-thirds of one percent multiplied by 36 months.

The chart below shows the relationship between birth year and full retirement age. It also shows the benefit a retired workers will receive (as a percentage of their PIA) if they claim Social Security at ages 62 and 70. In other words, it shows the smallest and largest benefits retired workers in each age group could receive.

Data source: Social Security Administration.

As shown above, workers born in 1960 or later receive 70% of their PIA if they claim Social Security at age 62. But they receive 124% of their PIA if they claim Social Security at age 70. Put differently, workers born in 1960 or later can increase their retirement benefit 77% by simply claiming Social Security at age 70 rather than age 62.

Here is an example using real numbers: In 2023, the average retiree had a PIA of $2,042. If we assume a birth year of 1960 or later, the average retiree will receive about $1,429 per month if they claim Social Security at age 62. But they will receive $2,532 per month if they claim Social Security at age 70. That represents a 77% increase.