Social Security is, for many Americans, a financial lifeline that ensures they can meet their expenses during retirement. Data from the Social Security Administration (SSA) in 2016 showed that 61% of current beneficiaries count on their Social Security benefits for at least half of their monthly income. This figure is an even higher 71% for unmarried elderly individuals.
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As of the January 2017 snapshot published by the SSA, the roughly 41.4 million retired workers were receiving an average of $1,363 each month in benefits. While this roughly $16,300 in annual income may not sound like much, it's enough to keep almost a third of all seniors out of poverty, according to estimates from the Centers on Budget and Policy Priorities (CBPP). The CBPP found that retired worker poverty rates are 8.8% with Social Security income present, and would be estimated at higher than 40% in its absence.
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When you claim Social Security matters
However, what you're ultimately paid each month by Social Security depends largely on when you begin taking benefits. Social Security benefits can begin paying out at age 62, and claims can be submitted at any point thereafter up until you turn 70, at which point distributions are mandatory.
The poorly understood concept of Social Security that seems to trip up most pre-retirees and seniors is the idea behind waiting for larger benefits. While surveys have shown that most people understand that Social Security benefits grow over time, most don't have a good grasp of how much. The answer to this elusive question is that your benefits grow by approximately 8% for each year that you hold off on claiming Social Security, up until age 70. Once you hit age 70, your benefits no longer grow in size, so there is no longer any added incentive to hold off on claiming.
What you're paid also depends on your full retirement age, or the age at which the SSA deems you eligible to receive 100% of your monthly benefit. Your full retirement age is based on your birth year (this handy table from the SSA will help). For this year's newest retirees turning age 62 and born in 1955, it's 66 years and 2 months.
The relationship between your full retirement age and your claiming age is pretty simple. If you take Social Security between age 62 and prior to hitting your full retirement age, you'll receive a permanent reduction to your benefit for life of up to 30% (for those born in 1960 or later claiming as early as possible). On the other hand, if you wait till somewhere between after your full retirement age and age 70 to take Social Security, your benefit could be up to 30.7% higher than what it is at your full retirement age.
This is why your claiming decision holds so much weight with regard to what you're eventually paid each month for the rest of your life.
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Baby boomers are making a big mistake if they claim at 62
There's no magic formula that determines when someone should claim Social Security. It's a personal decision that varies based on a number of factors, including income needs.
For example, people who aren't in good health, those who can't find work (and therefore don't generate any income), and married spouses with income considerably lower than that of their spouse may all benefit from filing earlier rather than taking Social Security later.
However, one group of people that would be strongly advised from taking Social Security at age 62 is the baby boomers. Remember, filing as early as possible at age 62 could mean accepting a 25% to 30% monthly reduction in benefits from what you'd get filing at your full retirement age.
But there's a lot more to this logic than just "waiting longer will net you more money."
According to the 2016 report from the Insured Retirement Institute (IRI), 59% of baby boomers were expecting to rely on Social Security to be a "major" source of their income. This is almost the exact same figure as among current retirees. More importantly, the IRI survey found that a terrifyingly high 45% of those surveyed didn't have a dime in savings for retirement. Another 30% had stopped contributing to their retirement accounts. In other words, a majority of baby boomers are probably woefully underfunded and unprepared for the costs of retirement.
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Simple logic might dictate that the best solution would be to add income as quickly as possible (i.e., by claiming Social Security at age 62), but this would be the worst of all possible solutions. Claiming early means accepting a substantial reduction in benefits for the remainder of your life. If you're expecting to lean heavily on Social Security income during retirement, your goal should be to maximize your monthly payout, not minimize it. If there's a group of individuals that should be waiting until between ages 66 and 70 to claim Social Security, it's the baby boomers.
If you're healthy and you don't have very much saved for retirement, your smartest move is to continue working at least a few extra years beyond age 62. Your wages can be used to cover your monthly expenses, any extra income can be moved into savings, and all the while your Social Security benefits can grow by 8% annually. Thus, when you retire, you can wind up with around 100% of your monthly benefit, if not more.
Though not every boomer is in dire straits when it comes to saving money, far too many are. If you're a baby boomer nearing retirement, strongly consider waiting to take Social Security until closer to, or after, your full retirement age.
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