Social Security is one of the most important programs for Americans reaching old age, yet polls from Gallup over the years have found a consistent gap between how much people expect Social Security will provide for them in retirement and the reality they face once they start claiming benefits. If you figure out now how much you can rely on Social Security, you can plan how best to take advantage of the program when you retire.
Social Security: expectations versus reality
Since 2001, Gallup has asked non-retired Americans each year, "When you retire, how much do you expect to rely on Social Security -- will it be a major source of income, a minor source of income, or not a source at all?" From year to year, roughly 65%-70% of Americans have said they expect Social Security to be a minor source of income or not a source at all. That's broken down into roughly 50% who expected Social Security to be a minor source and 15%-20% who didn't expect Social Security to be a source of income.
Yet the reality Americans experience when they retire is much different. Gallup asks retired Americans each year, "How much do you rely on Social Security today -- is it a major source of income, a minor source of income, or not a source at all?" Roughly 55%-60% of retired Americans said Social Security was a major source of income. That's double the 30% of non-retired Americans who expect Social Security to be a major source of income.
In short, there's a huge gap between expectations and reality. Further, only 30% of retirees said Social Security was a minor source of income, while just 10% said it was not a source at all.
Planning ahead to take Social Security smartly
If you recognize how important Social Security will be to you, then you can set in place strategies to make the most of your benefits. The biggest decision you have to make regarding Social Security is when to claim your benefits.
You can claim Social Security benefits as early as age 62, although claiming benefits that early will cause your monthly checks to be 25%-30% smaller than they would be if you waited until your "full retirement age," which is between 66 and 67, depending on when you were born. Although you get a few more years of checks by claiming early, for the typical American, it makes sense to wait until your full retirement age or later to claim.
Assuming a full retirement age of 66, a breakeven analysis of claiming Social Security at either the earliest possible age of 62 or the full retirement age of 66 shows us that if you expect to live past age 77, then it makes sense to wait until your full retirement age. Beyond age 77, you will have received more in lifetime benefits by waiting until your full retirement age to take Social Security.
While the Social Security Administration correctly claims that "someone living to average life expectancy (78) should expect to receive the same amount of benefits over their lifetime," if you've made it to age 62, then you are already ahead of the game, and you should expect to live beyond the average life expectancy for all Americans.
Social Security benefits at 62 versus 66 for males
According to Social Security Administration data, at age 62, male Americans, on average, live another 20 years to age 82. And 65% of that group will live to see 78, so 65% of male Americans would receive more in cumulative benefits if they waited until age 66 to take Social Security benefits, rather than claiming them at age 62.
Social Security benefits 62 versus 66 for females
For females, this is an even easier decision. According to the SSA, 62-year-old females should expect to live another 22 years to age 84, and 75% will make it to at least 78, so 75% of females would receive more in cumulative benefits by waiting until their full retirement age to claim them.
Social Security benefits at age 66 versus age 70
For every year you delay taking your Social Security benefits past your full retirement age, your benefits increase by 8% a year up until age 70. Note that this does not apply to spousal benefits. For those with a full retirement age of 66, this means you can receive up to 32% more a month by waiting until age 70 to claim benefits. Another break-even analysis shows us that if you expect to live past age 82, then it makes sense to claim at the full retirement age.
Based on SSA data, 48% of males and 61% of females would maximize their lifetime benefits by waiting until age 70 to take Social Security benefits.
There's more to it than the dollar amount
In reality, most American's either want or need to supplement their income sooner than age 70. In fact, only about 6% of Americans claim Social Security benefits after their full retirement age. Last year, 35% claimed at 62, another 35% claimed at 66, and 24% claimed somewhere in between.
But if you can wait to claim Social Security benefits until your full retirement age, it might work out best for you in the long run.