In April, more than 66 million people took home a benefit check from Social Security, 49.3 million of which were retired workers. Among these retirees, close to 90% rely on their monthly payout to cover some portion of their monthly expenses.
Whether you’re already retired or have just entered the workforce, surveys consistently show that most Americans will lean on their Social Security payout in some capacity during their golden years. In other words, maximizing what you’ll receive from the Social Security program is important.
However, what you’ll be paid monthly by America’s top retirement program can vary greatly depending on a number of key factors.
Four components are used to determine your monthly Social Security check
All told, more than a half-dozen elements can impact what you’ll bring home monthly and/or get to keep from your benefit check. As an example, Social Security benefits become taxable above certain income thresholds. Additionally, a dozen states tax Social Security payouts to some varied degree.
But when whittled down to the basics, four components are, ultimately, responsible for determining what you’ll receive each month from Social Security: work history, earnings history, full retirement age, and claiming age.
As I’ve pointed out before, your work history and earnings history are intertwined. When calculating your monthly benefit, the Social Security Administration (SSA) takes into account your 35 highest-earning, inflation-adjusted years. If, for instance, you only work 25 years and retire, the SSA will average a $0 into your calculation for the other 10 years. It truly does pay to work for at least 35 years if you want an opportunity to maximize what you’ll receive from Social Security.
The third component is your full retirement age, which is determined by your birth year. Your full retirement age is the age at which you become eligible to receive 100% of your retired worker benefit. For context, the full retirement age has increased from 65 to 67 over the past four decades. Anyone born in 1960 or later will have to wait until they turn 67 if they want to receive 100% of what they’re due.
The fourth factor — and the one that will have the biggest impact on what you’ll receive each month — is your claiming age. If you, hypothetically, drew a line in the sand to represent your full retirement age, any claim for which you receive benefits prior to this point will result in a permanently reduced monthly check. Conversely, waiting until after this proverbial line in the sand can increase what you’ll receive for the remainder of your life above and beyond the 100% you’re due at your full retirement age.
For every year that a retiree holds off on taking their payout (beginning at age 62), their benefit can grow by up to 8% up to age 70.
|Birth Year||Age 62||Age 63||Age 64||Age 65||Age 66||Age 67||Age 68||Age 69||Age 70|
|1960 or later||70.0%||75.0%||80.0%||86.7%||93.3%||100.0%||108.0%||116.0%||124.0%|
Two claiming ages, in particular, rarely work out for retirees
Claiming age is the unquestioned wild card with the potential to make or break your retirement. As you can see from the detailed table above, an early or late claim can substantially change what you’ll receive each month.
For example, a person born in 1960 has the opportunity to begin receiving their Social Security benefit as early as age 62. But in doing so, they’d be accepting only 70% of what they’d receive if they waited until age 67. With the average retired worker bringing home $1,834.80 in April 2023, a 30% permanent reduction would equate to $550.44 less per month, or $6,605.28 each year.
The opposite is also true. If this same individual born in 1960 were to wait to receive their payout until age 70 — the age at which benefits stop growing — their monthly Social Security check would be 24% higher than they’d have taken home when turning 67. This eight-year claiming gap between 62 and 70 can lead to a nearly $1,000 difference in monthly benefits for the average retired worker.
Which claiming age will put the most money in retirees’ pockets over their lifetime? For that, I’ll turn to the statistical analysis conducted by online investment management and financial planning company United Income.
Four years ago, United Income released a report that analyzed the claiming decisions made by roughly 20,000 individuals. Using claims data from the University of Michigan’s Health and Retirement Study, United Income extrapolated individual claiming decisions to determine whether retirees had made an optimal choice — “optimal” in the sense that it resulted in the beneficiary receiving the highest possible lifetime benefit.
The claims data showed that most Social Security recipients began taking their payout well before reaching their full retirement age. However, this move rarely paid off. Based on United Income’s extrapolated analysis, ages 62 and 63 were the two worst claiming ages, with a mere 6.5% of claimants making an optimal choice by claiming this early.
As I highlighted recently, the three best Social Security claiming ages were after a claimant’s full retirement age. In fact, 57% of the retired workers analyzed by United Income would have benefited most by waiting until age 70 to receive their monthly payout.
There’s no perfect formula when it comes to taking your Social Security benefit
I’d love to tell you that this cut-and-dried analysis puts an end to the debate of when retirees should begin taking their Social Security benefits. But it’s just not that easy. There’s absolutely no way to know whether we’re making the best choice. The only way to concretely determine that an optimal claiming decision was made is to know our own expiration date — and frankly, that’s something I’m glad I don’t know.
With no ideal formula for determining the optimal claiming age, we’re left to assess personal factors, such as financial needs, marital status, and health, to aid in the claiming decision process.
For instance, if you don’t have much saved for retirement, Social Security will likely represent a major source of income. If that’s the case, waiting and collecting a higher monthly benefit could be a smart move, depending on your health.
That leads me to the next point: Your health matters. If you have one or more chronic health conditions, an early filing can make sense. Remember, the goal is to maximize what you’ll receive from Social Security over your lifetime, not necessarily what you’ll net on a monthly basis.
Marital status is important, too. Whereas a single individual with no young children won’t have to worry about the implications of their claiming decision, an early filing has the potential to adversely impact the survivor payout for a spouse. For married couples and/or those with young children, a Social Security claiming decision can mean taking into account the needs of the entire family.
While the data pretty clearly shows that waiting will be beneficial more often than not, everyone’s situation is unique. It means you’ll need to examine the factors that matter most to you, with the ultimate goal being to maximize what you’ll receive over your lifetime from Social Security.
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