Whether you realize it or not, Social Security is our nation's most important social program. Of the 63 million benefit checks divvied out each month, more than 22 million are responsible for lifting individuals above the federal poverty level, which in 2019 is $12,490 in earned income for a single individual. This ability to provide a financial foundation is most prevalent with senior citizens, where the estimated poverty rate would be north of 40% if the program didn't exist, according to an analysis from the Center on Budget and Policy Priorities.
However, Social Security is also a program that we tend to lean on far too heavily. Though it's only designed to replace about 40% of the average worker's salary during retirement, 62% of today's retired seniors lean on it for at least half of their monthly income, with 34% counting on Social Security as essentially their only source of income.
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With that being said, no decision bears more importance for seniors than deciding when to take their benefits.
What goes into your Social Security benefit calculation?
As a quick refresher, the Social Security Administration (SSA) has a formula it uses to determine your monthly payout. This formula takes four main factors into account.
The first two factors -- your work history and earnings history -- are tied at the hip. With the SSA using your 35 highest-earning, inflation-adjusted years when calculating your benefit at full retirement age, it means you'll want to work at least 35 years, as well as earn as much as you can in the years you do work -- up to the maximum taxable payroll cap -- if you want any shot at maximizing your payout. Each year less of 35 worked will result in $0 being averaged into your overall calculation, which will drag down your eventual payout.
The third factor is your birth year, which is what helps determine your full retirement age. This is the age at which the SSA deems you eligible to collect 100% of your monthly benefit. Claiming at any point before this age means accepting a permanent reduction to your benefit, while waiting until after your full retirement age can lead to a permanent monthly bonus.
The fourth and final factor is your claiming age, which can arguably have the biggest impact on what you'll be paid each month. Retired-worker benefits can begin at age 62 or any point thereafter. However, there's a pretty big "bonus" if you decide to be patient.
For each year you hold off, your benefit will grow by approximately 8%, up until age 70. That means, all things being equal (i.e., work and earnings history and birth year), someone claiming at age 70 could net 76% more per month than someone claiming at age 62.
The most important Social Security table you'll ever see
For those of you who are more visual learners, I'm going to introduce you to what could very well be the most important Social Security table you'll ever see. It's a layout that describes what you'll receive from the Social Security program based on your birth year and claiming age.
For people born between 1943 and 1954, your full retirement age is 66. For those born in 1960 or later, it's age 67. For those of you born between 1955 and 1959, the full retirement age increases by two months per year. Thus, for people born in 1955, it's 66 years and two months, for 1956 it's 66 years and four months, and so on until it becomes affixed at age 67 for those born in 1960 or later.
Once you know your full retirement age, you can use the following table to really understand the dynamics of your payout.
|Birth Year||Age 62||Age 63||Age 64||Age 65||Age 66||Age 67||Age 68||Age 69||Age 70|
|1960 or later||70%||75%||80%||86.7%||93.3%||100%||108%||116%||124%|
Let's look at a few examples, but we'll need a baseline first. As of January 2019, the average Social Security benefit paid to retired workers was $1,464 per month. Just for the sake of simplicity, let's just pretend that this is what you'd receive per month at full retirement age.
First up, we have a baby boomer born in 1954 who's deciding when to take their benefit. Waiting until full retirement age (66) would net this person their full payout of $1,464 a month.
But let's say they're not in the best health and decide that age 63 makes sense as a claiming age. At age 63, the table shows that anyone born between 1943 and 1954 will receive 80% of their full retirement benefit on a monthly basis. Thus, 80% of $1,464 is $1,171.20 a month. The trade-off here is that this individual must accept a lifetime monthly reduction to their payout of 20% but will receive payouts starting years earlier than those who choose to wait.
How about a millennial who'll be retiring three decades from now and is therefore part of the "born in 1960 or later" crowd? The table above shows that millennials will need to wait until age 67 to collect the full $1,464 a month, or a full year longer than many of the early baby boomers. Of course, should they really wait things out and claim their benefit at age 70, they'd receive a 24% bonus each month, or $1,815.36.
Monthly benefits aren't everything
Now that you have the knowledge and capability of understanding how your full retirement age and claiming decision will affect your monthly payout, let me leave you with one additional important suggestion: Don't focus too much on your monthly benefit.
Deciding when to claim benefits is a personal decision that'll involve many variables that are unique to you and you alone. While there are guidelines that can help you decide when to take benefits, there's no such thing as a perfect template that ensures you'll get the most out of the program.
Instead, when it comes time to ponder your Social Security claiming decision, think about the variables that'll allow you to get the most from the program over your lifetime. If, for example, you're in excellent health and your immediate family has lived well into their 80s or beyond, then a late claim might make perfect sense, even if you don't know your life expectancy. Then again, an early claim could be just as lucrative for folks in poor health, even with a permanent reduction to their monthly payout.
Everything is relative to your variables. Don't forget that.
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