One of the most important financial decisions you'll have to make for retirement is figuring out when to claim Social Security. That's because your filing age will help determine what monthly benefit the program pays you.
On a basic level, your monthly Social Security benefit is calculated based on how much you earned during your 35 most profitable years in the workforce. From there, you'll get that benefit in full if you sign up at full retirement age, which is 67 for anyone born in 1960 or later.
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However, you're allowed to claim Social Security as early as 62. And for each month you sign up ahead of full retirement age, your monthly benefit gets reduced.
On the flipside, you can delay Social Security for larger monthly checks. For each year you wait beyond full retirement age, your monthly benefit increases 8%, up util you reach age 70.
It's important to weigh the pros and cons of different Social Security filing ages to land on the right choice. But there's another factor you may want to consider also, and it's the potential for Social Security cuts.
Why Social Security is facing cuts
Social Security gets most of its revenue from payroll taxes. In the coming years, though, baby boomers will undertake a mass exodus from the workforce and file for the benefits they've earned. That's going to put a huge strain on Social Security, since the number of younger workers entering the labor force is not expected to be large enough to replace retiring boomers.
Social Security can use the money in its trust funds to make up for any revenue shortfall it experiences as long as those funds have money in them. But according to the most recent Social Security Trustees report, the program's combined trust funds are expected to run out of money in 2034.
At that point, only 81% of benefits are expected to be payable. So unless lawmakers find a solution, Social Security recipients could be in for a pretty steep reduction in their monthly checks.
How Social Security cuts might affect your claiming decision
Your Social Security filing age should be based on a number of factors:
- Your retirement income needs.
- Your non-Social Security retirement income sources.
- Your health.
Imagine you think you'll live an average lifespan, and that you expect to need a monthly income of $6,000 in retirement to manage your bills comfortably and have money left over for extras, like hobbies or a couple of yearly trips.
It may be that based on your earnings history, you're entitled to $2,500 a month in Social Security at full retirement age. If you think you can get $3,500 a month out of your savings, then you should be all set to sign up for Social Security at 67.
But not so fast. If Social Security is slashed broadly, then your $2,500 monthly benefit may end up being more like $2,000 if the program is only able to pay about 81% of what you should be getting. So in that situation, you would have a choice -- either adjust your retirement spending and goals, or delay your Social Security claim to score a larger monthly check.
This is just one example. The point, though, is that when you run your retirement numbers, it's important to calculate an alternate scenario where Social Security cuts happen and see where that takes you.
An early Social Security filing, for example, might seem doable based on getting your monthly benefit at its current level -- not a reduced level. It's important to account for that so you don't end up in a financial bind.
