Author: Sean Williams | March 20, 2019
There’s no variable more important than your claiming age
Chances are that, when you retire, you’ll be reliant on Social Security income in some capacity to make ends meet. Data from the Social Security Administration (SSA) finds that 62% of today’s retired workers lean on the program for at least half of their income. Meanwhile, a 2018 Gallup survey found that 84% of nonretirees expect to need Social Security income in some capacity during retirement.
This data reaffirms that maximizing what you’ll receive from the program over your lifetime is of great importance -- and there’s no variable that can have a bigger impact on what you’ll eventually receive than your claiming decision.
The SSA will take four primary factors into account when calculating your retirement benefit. The first two -- your earnings history and work history -- are inextricably linked. Your 35 highest-earning, inflation-adjusted years are used when determining your benefit.
The third factor, which you have no control over, is your full retirement age, as determined by your birth year. Your full retirement age is the age at which you become eligible to claim your retired worker benefit and receive 100% of your monthly payout. For most everyone, it’s either age 66 (for those born between 1943 and 1954), 67 (for people born in 1960 or later), or somewhere in between 66 and 67 (for folks born between 1955 and 1959).
The fourth and final factor, and the one that can impact your monthly payout by as much as 76% (all other factors being equal), is your claiming age. Although you can begin taking retired worker benefits at age 62, for each year you hold off on your claim, your payout grows by about 8%, up until age 70.
Of course, there are pros and cons about each claiming age between 62 and 70. Today, we’ll take a closer look at what you can expect from each of these nine different claiming ages, as well as what group of people might benefit from an early, mid, or late claim.
1. Claiming at age 62
What can you expect?: Depending on your birth year, your monthly benefit can be reduced by up to 25% to 30% from what you would have received at full retirement age.
Advantages of taking benefits at 62: The obvious advantage of claiming early is that you won’t have to wait to get your hands on your retirement income. Also, in the event that Congress fails to shore up Social Security and benefits are cut by up to 21% in 2034, as the latest Trustees report has predicted, claiming early could secure you more years of consistent payouts before those benefit cuts take hold.
Disadvantages of claiming at 62: On the other hand, claiming early means accepting a pretty steep reduction in your monthly payout. If you wind up living longer than the average U.S. life expectancy (just under 79 years) you’ll be leaving a significant amount of money on the table. Claiming at 62 will also limit what your spouse can earn via a survivor benefit if you pass away first, and it may subject you to the retirement earnings test.
Who might benefit?: Probably the biggest beneficiary of an early claim would be persons with chronic health conditions that don’t expect to reach the average life expectancy. Claiming as soon as possible for persons in poor health often results in the highest lifetime income possible.
2. Claiming at age 63
What can you expect?: Depending on your full retirement age, claiming as soon as you turn 63 can reduce your payout 20% to 25% from what you would have received at full retirement age.
Advantages of taking benefits at 63: Waiting an extra year past your initial eligibility will boost your payout a bit, but still provide immediate income early on in retirement. Taking benefits earlier on may also help to pay down debts which you’d like to get out of the way sooner than later. After all, more and more seniors are entering retirement with mortgage debt and even student-loan debt.
Disadvantages of claiming at 63: The downside is that, once again, you’re giving up a pretty substantial amount of your monthly benefit by claiming at 63. It could be a prescient move if benefit cuts occur in 15 years, but it may also limit your spouse’s survivor benefit and, yet again, subject you to the retirement earnings test. This earnings test could result in some, or all, of your benefits being withheld if you earn too much.
Who might benefit?: Filing at age 63 can be particularly beneficial for a lower-earning spouse. With the idea that a higher-earning spouse will allow their benefit to grow over time to provide a bigger boost to household income down the road, the lower-earning spouse can opt for an earlier claim, such as at age 63, to provide some income for the household in the interim.
3. Claiming at age 64
What can you expect?: Should you claim at age 64, you can expect a reduction to your monthly benefit check of 13.3% to 20%, depending on your full retirement age.
Advantages of taking benefits at 64: Waiting two years post-eligibility is going to provide even more punch to your monthly benefit check. If your health is somewhere between average and poor, then a filing at age 64 may help you receive the most from Social Security over your lifetime. And, like before, claiming early may also help pay down debts.
Disadvantages of claiming at 64: On the flipside, claiming at 64 still comes with significant permanent reductions to your monthly payout, which means you’ll be leaving money on the table if you live to age 80 or beyond. As before, it also limits what your spouse can receive in survivor benefits if you pass away first, and it’ll expose you to the retirement earnings test if you earn too much.
Who might benefit?: If you don’t expect to be reliant on Social Security during retirement, claiming at 64 might make sense. Utilizing Social Security income for vacations or hobbies while you’re still active enough to enjoy them could be a smart move.
4. Claiming at age 65
What can you expect?: If you decide to take benefits at age 65, you can expect a permanent reduction to your monthly payout of 6.7% to 13.3%, depending on your full retirement age.
Advantages of taking benefits at 65: Waiting three years post-eligibility is going to provide some balance to your claiming strategy. You’ll have allowed your payout to grow for three years, yet you’ll still have about two decades of benefit checks in your future, if you’re the average American (the average 65-year-old lives approximately 20 more years, per the SSA). Age 65 is also when Medicare eligibility begins, which can mean a seamless transition to receiving the best of both core social programs.
Disadvantages of claiming at 65: Not to sound like a broken record, but claiming prior to your full retirement age means accepting a reduction to your monthly benefit. If you should live past the life expectancy inflection point, you’ll have left lifetime benefits on the table that could be higher had you waited. Additionally, claiming at 65 can lead to a slightly reduced survivor benefit for your spouse, as well as exposure to the retirement earning test.
Who might benefit?: Seniors who find themselves heavily in debt may benefit from claiming at age 65. With only one or two more years of being subjected to the retirement earnings test at this point (depending on your birth year), and having allowed your benefit to grow for three years, the added income each month may prove pivotal in helping lower your debt as you enter retirement. In a “worst” case scenario, your withheld benefits will be returned in the form of a higher monthly benefit when you hit full retirement age.
5. Claiming at age 66
What can you expect?: For folks born between 1943 and 1954, age 66 is your full retirement age, meaning you’d receive 100% of your payout. For persons born in or after 1960, you’ll see a monthly payout reduction of up to 6.7%.
Advantages of taking benefits at 66: Taking your payout at the median age means receiving your full benefit, or some amount very close to it. With most seniors leaning on Social Security more than they should, this should help ensure a reasonably healthy source of income that’ll lift millions above the federal poverty line. More importantly, for those boomers with a full retirement age of 66, it means your spouse will have the opportunity to receive a full survivor benefit if you pass away first, and the retirement earnings test will no longer apply to you.
Disadvantages of claiming at 66: One of the bigger disadvantages is that you’ll have to wait four years post-eligibility before you’ll be receiving any income. This means either working longer or relying on another source of retirement income. If you’re part of Generation X, Y, or Z, it also means a permanent reduction in your monthly payout, and another year of being exposed to the retirement earnings test.
Who might benefit?: Baby boomers in average health that were born in or before 1954 would be clear beneficiaries since they’d receive 100% of their payout without hurting their spouse’s income potential, and they’d no longer be exposed to the retirement earnings test. You’ll note that little bit about “average health,” as well. If you expect to reach the average U.S. life expectancy, claiming at 66 may help you reach the highest possible lifetime payout.
6. Claiming at age 67
What can you expect?: By the time we reach age 67, everyone has hit full retirement age. This means people born in 1954 and earlier can expect an 8% bonus (108% total) each month, with people born in or after 1960 receiving their full retirement benefit (100%).
Advantages of taking benefits at 67: The big advantage of waiting until age 67 is receiving a larger monthly check, which could come in handy if benefit cuts do come to fruition. Even with cuts, you’d still be receiving a healthy amount of monthly income to help make ends meet. Plus, at age 67 no one will be subjected to the retirement earnings test, meaning you could work and earn Social Security income, if you chose to. At this age, Generation’s X, Y, and Z will ensure that their spouses have the opportunity to maximize their survivor benefit, too, should they pass away first.
Disadvantages of claiming at 67: The downside is that you’ll have to wait five years after initial eligibility before you’ll get a cent from the program. If you’re not in average to above-average health, waiting until age 67 could mean netting a higher monthly payout, but lower lifetime income than if you claimed earlier, because you may not live as long. A higher monthly payout also increases your likelihood of being exposed to Social Security’s taxation of benefits.
Who might benefit?: Age 67 might be the perfect time for those folks born in or after 1960, who are in good to above-average health, to take benefits. As noted, there’d be no exposure to the retirement earnings test, and your spouse would have the opportunity to maximize his or her payout should you pass away first.
7. Claiming at age 68
What can you expect?: With everyone having eclipsed their full retirement age, payouts at age 68 will be 8% to 16% higher than what they’d have been at full retirement age, depending on your birth year.
Advantages of taking benefits at 68: The clear-cut advantage here is you’re going to get a superior monthly benefit check. If you’re in good to excellent health, that could be your ticket to maximizing your aggregate income from the program. Also, should a benefits cut come to fruition, you’ll still be receiving a healthy monthly check.
Disadvantages of claiming at 68: Then again, you’ll have to forgo six years of income if you decide to claim at age 68. If you don’t live to about age 80, your decision to wait may have cost you lifetime income from the program. As noted earlier, making more annually from Social Security also increases your chance of having your benefits taxed at the federal level. It’s also worth pointing out that if benefit cuts do arise, you’ll have forgone six years of pre-cut income potential.
Who might benefit?: Claiming at age 68 might be a great decision for notably higher-earning spouses. Allowing their benefits to grow for six years should provide the household with a healthy boost in income for (hopefully) more than a decade to come. This higher income can be added with that of the lower-income spouse, who would have claimed their benefit roughly five years earlier.
8. Claiming at age 69
What can you expect?: The bonuses start to really pile on if you wait until age 69 to take your benefit. At this age, payouts will be 16% to 24% higher than they would be at full retirement age, depending on your birth year.
Advantages of taking benefits at 69: If you’re willing to wait seven years past your first year of claiming eligibility, you’ll receive a meaningful bonus above what you’d have received at full retirement age. This added income can come in especially handy if you’re in excellent health and live beyond the average life expectancy. Plus, as with all claiming ages after full retirement age, there’s no retirement earnings test, meaning you could double-dip with a working wage as well, should you choose to do so.
Disadvantages of claiming at 69: The problem is that you’ll first have to forgo seven years of benefit-collecting potential and hope you make it to age 69 and beyond. Waiting this long will require either good saving habits earlier in life or the need to continue working until late in your 60s or early 70s. If you’re in poor health, waiting until 69 to take benefits almost certainly wouldn’t be a good move.
Who might benefit?: This is the perfect time for the ultra-wealthy who won’t be counting on Social Security at all to take their benefit. Since the rich tend to substantially outlive the average life expectancy, waiting to net a larger payout over a presumed extended period of time makes sense. Plus, since the wealthy are likely to owe tax on up to 85% of their Social Security payout, forgoing seven years of payments means seven years with a slightly lower tax bill.
9. Claiming at age 70
What can you expect?: This is the pinnacle. At age 70, which is the age where benefits stop accruing if you’ve decided to wait, folks born in or before 1954 can see a benefit boost of up to 32%, with those born in 1960 or later seeing an increase of up to 24%.
Advantages of taking benefits at 70: The advantage of patience is that you’ll be rewarded handsomely. Wait until 70 to claim your benefit and you’ll max out your monthly payout, at least based on your earnings and work history. With life expectancies lengthening over time, waiting can help your money stretch further. Plus, if you’ve got little saved for retirement and plan to lean on the program, waiting can make a world of difference.
Disadvantages of claiming at 70: The other side of the coin is that waiting until age 70 to claim means having to go without a benefit for eight years. You’ll need ample savings or the ability to work into your 70s if you’re going to wait that long to begin taking your payout. There’s also the possibility of passing away prior to age 70, or before you reach the inflection point between claiming early or late. In other words, waiting may not guarantee you the highest lifetime payout.
Who might benefit?: Soon-to-be retirees with little or nothing saved, this claiming age is for you. Although the SSA suggests that Social Security should replace only 40% of your working wages, those who’ll lean on the program for nearly all of their income, and who have little saved, may benefit from working until at least age 70 and forgoing their payout until then. A workers’ overall health and marital status will come into play, but it’s a smart consideration if you’ll be overly reliant on the program.
Ultimately, your claiming decision is a bit of science and luck
With all this being said, this is when I tell you that deciding when to claim Social Security benefits is a bit of science and luck.
No matter how much planning you put in to deciding when to take Social Security, there will always be some degree of luck involved. That’s because none of us (thankfully) knows out expiration date. Without this key piece of knowledge, we can never know with any certainty if the decision we’ve made will result in the highest possible lifetime payout.
Additionally, we have to keep in mind that the goal isn’t necessarily to get the highest monthly payout, but rather to collect as much from the program as we possibly can over our lifetime. For some folks, that might mean waiting until age 70 and maxing out their monthly payout. For others, it could mean claiming at age 62 or 63, taking a substantial haircut to their monthly benefit, but collecting that income much earlier than someone else waiting for age 69 or 70.
Ultimately, this is a personal choice with variables that’ll be unique to everyone. There is no perfect template, so make sure you understand the variables that matter to you before making your all-important claiming decision.
The Motley Fool has a disclosure policy.