Whether you realize it or not, Social Security is a critical program that's relied upon by tens of millions of retired workers. The February snapshot from the Social Security Administration (SSA) shows that more than 41.4 million retired workers were being paid an average of $1,363.66 each month.
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What's more, 61% of these retired workers count on this average payout to comprise at least half of their monthly income. Thus, Social Security has transformed over the past couple of decades from being just a supplemental income source during retirement to a primary income source for millions of senior citizens.
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Your claiming age has a major influence on your payout
What a lot of working Americans and pre-retirees probably fail to realize is that what they're ultimately paid each month by the program is entirely up to them. The SSA takes your 35 highest-earning years into account when calculating your average annual earnings, so it's in your best interests to work for at least 35 years, as well as earn as much as you can while working.
But the biggest X-factor of all is likely your claiming age. Depending on when you file for Social Security benefits, your monthly payout could vary by as much as 76%! This is because your eventual payout grows by approximately 8% for each year that you hold off on filing for benefits, beginning at age 62 and ending at age 70.
The most important figure you need to know is your full retirement age, or FRA. Your FRA is determined by your birth year (this handy SSA table should help you locate your FRA), and it's the age at which the SSA will pay you 100% of your due monthly benefits. For the newest eligible retirees born in 1955, your FRA is 66 years and 2 months. If you claim at any point prior to hitting your full retirement age, your benefits are permanently reduced. Claiming at the earliest age possible, age 62, could result in up to a 25% to 30% permanent reduction, depending on your birth year.
Conversely, claiming at any point after your FRA can actually result in a larger monthly payout. Filing for benefits at age 70 could increase your payout by 24% to 32% over what you would have received at your FRA.
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An illustration of what the average American would be paid by claiming Social Security at age 65
According to data from the Centers for Retirement Research (CRR) at Boston College, roughly 90% of Social Security beneficiaries will file for benefits at or before reaching their full retirement age. Nearly a third do so at age 65 or 66, which is deemed to be the full retirement age by CRR's calculations, while approximately 60% do so between the age of 62 and 64.
Traditionally, age 65 has been a popular time for seniors to hang up their coats and work gloves for good. For those born in 1955 (i.e., the newest retirees), this would mean accepting a permanent 7.8% reduction in monthly payouts, since their full retirement age is 66 years and 2 months.
Let's take an illustrative look at what the average American claiming at age 65 would be expected to receive in lifetime benefits. For this, we'll use the aforementioned $1,363.66 average monthly payout to retired workers as our full retirement age baseline, and we'll also assume an average annual cost-of-living adjustment of 2%.
Data source: Social Security Administration. Author's calculations based on a 2% annual cost-of-living adjustment for an individual born in 1955 and claiming at age 65. Chart by author.
As you can see from the above, an individual born in 1955 and claiming at age 65 would receive about $15,088 in his or her first year. By age 75, more than $183,500 in income would have been received from Social Security. By age 80, which is a tad bit longer than the average Americans' life expectancy (78.8 years), $281,211 would have been paid out. Should you make it to age 90, you'd collect more than $508,000!
It's a personal decision, but there are some guidelines
So what should you do? Should you claim before hitting your full retirement age like most people do and reap the early rewards of extra income, or should you patiently wait until your FRA -- or longer -- to receive a fatter monthly payment?
Surprisingly, the answer is going to be different for everyone. Your claiming decision is going to be influenced by a number of factors that are unique to you: your health, your income, your expenses, your savings, and whether other people are relying on you are just some of the factors that'll go into helping you decide when to claim Social Security benefits. Thankfully, though, there are some guidelines that may help steer you in the right direction.
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For instance, some people actually benefit from taking Social Security at an earlier age and accepting a permanently reduced payout. If you're in poor health, for example, it doesn't do you any good to wait to claim benefits. Other strong candidates to file for benefits early include those who are deeply in debt, low-earning spouses, the rich who won't be relying on Social Security income, and those who are struggling to generate income or can't find work.
On the other hand, there are people who would appear to benefit by waiting until their FRA, or even later. A good example is the higher earning spouse within a couple. Having the higher-income spouse wait to file means a bigger cumulative bump in pay for the couple later in life. People in good or excellent health, as well as those with little to nothing saved for retirement who'll probably lean heavily on Social Security, are best off waiting as long as possible to claim benefits.
Deciding when to claim benefits is an important decision, but it's ultimately in your hands.
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