The Social Security Administration (SSA) is currently paying out monthly benefit checks to almost 61.5 million people each month as of May -- 41.8 million of those folks (68%) are retired workers.
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On average, retired workers are taking home $1,367.58 per month, which nominally doesn't sound like a lot. Over the course of the year, we're talking about the average retired senior taking home $16,411, placing them only a few thousand dollars above the poverty level. Yet, this guaranteed monthly payment is what keeps millions of seniors from dipping below the poverty level.
Social Security benefits also represent the primary source of income for 61% of all retired workers, per SSA data. This means that when seniors decide to claim Social Security holds a ton of importance in terms of what they'll eventually be paid.
When you claim matters (a lot)
You essentially have three factors that you can control with regard to your eventual monthly payout. Two of these factors are interconnected: your earnings history and length of work. The SSA factors in your 35 highest-earning years when calculating your full retirement benefit, meaning it's in your best interests to earn as much as possible each year and work a minimum of 35 years, if not longer, to maximize what the program pays you.
That third factor is based on your claiming age. The SSA allows individuals to begin receiving benefits as soon as they turn 62, but filing a claim can be done at any point thereafter. There is, however, a major dangling carrot in the form of higher monthly payouts if you wait. Beginning at age 62 and ending at age 70, your payout increases by 8% per year. It even increases incrementally on a monthly basis, so waiting even a few more months can put more money in your pocket. All things being equal (e.g., income and work history), a retired worker claiming benefits at age 70 can net 76% more per month than a retired worker claiming benefits at age 62. In other words, it pays to wait.
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But if you look at the data aggregated by the Center for Retirement Research at Boston College, based on 2013 data, very few people actually wait until age 70 to collect (3% overall). At the other end of the spectrum, a lot of seniors file for benefits at age 62. Care to guess how many?
If you said 45%, give yourself a pat on the back. Some 42% of men and 48% of women are claiming benefits pretty much as soon as they possibly can and, in the process, are accepting a monthly check that could be up to 25% to 30% below what they would have received had they waited until their full retirement age (which for many of today's baby boomers will range from age 66 to age 67). Your full retirement age is the point at which you are eligible to receive 100% of the benefits you're due, and it's based on your birth year.
There are actually some very good reasons to claim at 62
On the surface, it looks like nearly half of all seniors are shooting themselves in the foot come retirement. After all, accepting up to a 25%-30% reduction in your monthly benefit check isn't optimal if it's your primary source of income. But some retirees have a very good and valid reason to be claiming benefit so early.
- You're in poor health: We're not mind readers and we have no clue when our expiration day will come. However, we do have a pretty good bead on our personal health and that of our immediate family. If you have a chronic condition that may impact your life expectancy, claiming benefits earlier is likely to give you more over your lifetime than waiting until a later time.
- You're wealthy: If Social Security income is an afterthought for you, claiming early might be in your best interests. Doing so could reduce your annual income compared to waiting for a higher payout later in life, thus lowering your tax liability a tad as well. Then again, waiting could give you a couple of extra years where you don't have to claim any Social Security income, thus keeping your federal tax liability a little lower in your early retirement years. Every situation is unique.
- You can't find work or generate income: Another clear reason to enroll for Social Security is if you're having difficulty generating income or finding a job. Best of all, a do-over clause is built into Social Security (known as Form SSA-521) that allows you to withdraw your application for benefits and repay every cent you've received from the SSA within 12 months of first receiving benefits. This is an especially helpful mulligan if you do find work within a year of filing for benefits and had previously struggled to find a job, or if you simply regret filing for benefits early.
- Low-income spouses: A spouse with a notably lower monthly payout than their significant other would likely benefit from claiming early and providing at least some income for the couple during retirement. This way, the spouse with the higher income can wait on his or her claim and watch it grow, ultimately providing a bigger income impact for the couple.
This is a terrible reason for claiming at age 62
On the other hand, there's another reason seniors claim benefits at age 62, and it's an absolutely terrible idea.
Soon-to-be retirees who haven't saved much, or anything, for retirement are turning to Social Security for a quick boost of income, and it's not a smart move. If you haven't saved much for retirement, your goal should be to wait as long as is reasonably possible before enrolling for benefits. By enrolling at 62, you're permanently cutting your monthly check by 25% to 30% for life, which is the exact opposite of what you should be trying to accomplish.
And it gets worse. According to the Social Security Board of Trustees 2016 report, the Trust is expected to have completely depleted its $2.85 trillion in spare cash by 2034. Should this happen, the report suggests that an across-the-board cut in benefits of up to 21% may be needed to sustain payouts through 2090. This means that if you claimed benefits at age 62 and took a 25% to 30% permanent hit to your payout, another 21% cut could have you being paid between 55% and 60% of your original full retirement benefit when all is said and done.
If your nest egg isn't anywhere near where it should be, you should be looking well past age 62 as your claiming age.
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