Deciding when to take Social Security benefits is one of the most important decisions you'll make in retirement. Should you take them at the earliest possible moment -- that is, at the age of 62? Or should you wait until reaching full retirement at 66?
While this is a personal decision that must be tailored to your own needs and desires, there are three factors every retiree should consider before making a final decision -- and particularly if you elect to receive Social Security benefits prior to full retirement age.
1. The size of your monthly benefits depends on when you elect to receive them
As you probably know by now, there are two major factors that influence the size of your monthly Social Security benefits.
First and foremost, your benefits are a function of how much eligible income you earn during your working life.
To determine this, the Social Security Administration adds up the income subject to Social Security tax, adjusted for inflation, that you earned during your 35 highest-earning years. It then divides the total by 420 -- the number of months in 35 years. This yields your average indexed monthly earnings. The higher this is, the higher your benefits will be.
The second major factor that influences the size of your benefits is when you elect to receive them -- click here to see why 62 is the "most prevalent age" to claim benefits.
For workers retiring now, the full retirement age is 66. If you wait until then, you get your full benefit -- or, in Social Security lingo, 100% of your "primary insurance amount." However, if you elect to receive them early, then your monthly benefit is reduced for each month short of your 66th birthday. If you begin receiving them at 62, for example, then your benefit will be reduced by 25%.
By contrast, if you wait until turning 70, then you're entitled to delayed-retirement credits, which increase your benefits by 8% for each year of deferment, topping out at a total of 32%.
2. For the average person, it doesn't matter when you apply
Given the fact that your monthly benefits are reduced if you elect to receive them early, then it seems obvious that you shouldn't do so, right?
For the average person, it ultimately doesn't matter when you elect to receive benefits, as the Social Security Administration has designed the average retiree's lifetime payouts to equal out regardless of when they choose to receive them.
"The Social Security benefit formula adjusts monthly payments so that someone living to average life expectancy should receive about the same amount of benefits over their lifetime regardless of which age they claim," explains a recent government report on Social Security.
At the end of the day, in other words, the average retiree shouldn't suffer for the decision to get smaller checks for longer.
3. Deciding when to apply for Social Security is about quality of life
With this in mind, the question of when to apply for Social Security benefits is less about some impersonal cost-benefit analysis and more about your needs and quality of life.
If you need income now, then you should take Social Security. If you don't, then you should defer. Additionally, if taking Social Security early will facilitate an earlier retirement -- which, in turn, will improve the quality of your life -- then you should absolutely do so.
This is the reason 62 remains the most prevalent age for retirees to claim benefits. And it's the reason you shouldn't hesitate to do so yourself if you believe it's the best option.
Remember, retirement is about you. It's about comfort, leisure, and reflection. Those are the things to keep in mind when deciding whether to claim benefits early, not some breakeven analysis that experts try to impose upon you.