You'll make a number of critical decisions during your lifetime when it comes to your finances, but arguably, one of the most important will be your choice about when to start taking Social Security benefits.
The Social Security program itself is designed to provide an income foundation for hard-working, but lower-income Americans during retirement -- although ultimately, everyone who's earned enough work credits can qualify for benefits. Nearly 19 out of 20 current workers will qualify for some form of Social Security retirement, disability, or survivor benefits.
Yet this program that seniors have come to count on for decades is in turmoil beneath the surface.
According to the latest report from the Social Security Board of Trustees, the Old Age, Survivors, and Disability Insurance (OASDI) Trust is on pace to burn through its remaining cash reserves by 2035, or less than two decades from now. Rising life expectancies are allowing retirees to draw a benefit from the program for a longer period of time than in decades past, and the exodus of baby boomers from the labor force and into retirement is weighing on the worker-to-beneficiary ratio. In plain English, in the coming years we'll see a shift from more cash flowing into the OASDI than it pays out, to more to cash flowing out of the OASDI than it take in. Assuming the Congress does not act, by 2035, all of its cash reserve will be gone, and a benefit cut as steep as 21% could be needed to sustain the program through 2087.
Given all this, your age when you choose to take benefits could be especially important, considering that a long-term, politically feasible solution to fixing Social Security remains somewhat elusive at this point.
Here's how much retirees will take home each month, by age
What can you expect to receive in benefits as a Social Security retiree? The answer to this will depend on a mixture of your income history (the Social Security Administration averages your pay over your 35 highest-earning years), as well as when you decided to file for benefits between the ages of 62 and 70.
The Social Security Office of Retirement and Disability Policy publishes a barrage of annual data in its Annual Statistical Supplement highlighting figures such as how much the average retiree takes home on a monthly basis based on their age, and this helps to shed some light on the issue.
Here's what the average Social Security benefit per month was in 2014 based on the age of the recipient:
One key point to mention before diving into the intricacies of the above chart is that this data is based on benefits paid during 2014, and benefits did rise in 2015, so you can probably expect a slight upward shift in these averages once the next Annual Statistical Supplement is released. It takes the SSA time to cull this data throughout the year, so we'll always be doing a little bit of backward-looking when analyzing these supplements, and the payment averages will, in many instances, be understated by a low single-digit percentage compared to where they are at this very moment.
What this chart can teach us
The most notable feature of the above chart is the magnitude by which average benefits soar from age 62 through age 70. That's because benefits left untouched between ages 62 and 70 grow in value on a monthly basis, equating to an 8% increase in value with each passing year. These "delayed-retirement credits" are the Social Security Administration's reward for waiting to draw money from the cash-strapped program.
Although this chart doesn't account for when each beneficiary claimed Social Security, the fact that the average benefit rises sharply and then levels off at age 70 is a clear indication of how much delayed-retirement credits can pay off in the long run. The problem is there's a lot of confusion about the magnitude of this growth and when it's most beneficial to file for benefits.
A study highlighted four years ago by AARP and Knowledge Networks showed that while nearly nine out of 10 pre-retirees understood that waiting to file for benefits allowed their eventual payout to increase in value, less than a third were aware of roughly how much their benefit could increase over time. Furthermore, only around a third understood how much their benefit could increase annually if left unclaimed, and a little more than a quarter were aware that age 70 is where your Social Security benefits max out. In other words, educational shortfalls are potentially keeping retirees from getting the most out of a program designed, first and foremost, to protect them.
For those who might not fully understand the ins and outs of Social Security, the aforementioned benefits by age chart demonstrates very stunningly how much of a game-changer it can be to wait until age 70, or at least your full-retirement age (the point at which you become eligible to receive 100% of your monthly benefits), which currently is age 66.
This doesn't mean there are aren't advantages to filing early. For instance, the ability to draw a payment for as many as eight years before someone who decides to wait could prove beneficial, especially if there was a purpose behind the funds, such as paying off a home, or perhaps an investment. But, in general, if you believe you'll live past the age of 78, waiting tends to offer the greatest rewards, as well as a benefits payment that's above and beyond 100% of your full-retirement benefit. For example, retirees born between 1943 and 1954 can earn up to 132% of their full-retirement benefit if they wait until age 70 to sign up for Social Security benefits.
The choice is ultimately yours. Just keep in mind how your choice could impact your financial foundation come retirement.