Regardless of whether you are already retired or just entering the job market, Social Security income can play an important role in making ends meet.
For more than two decades, national pollster Gallup has been surveying Americans to gauge their current or projected dependence on America’s best retirement program. Between 80% and 90% of retired Americans note that their Social Security benefits are a “major” or “minor” source of income. Meanwhile, 76% to 88% of future retirees expect to need their Social Security income in some capacity to cover their expenses.
In other words, getting the most out of Social Security will be critical to the financial well-being of generations of future retirees. But to maximize what you receive, you must first understand the ins and outs of how your Social Security benefit is calculated, as well as how your claiming age can meaningfully impact how much you receive each month and during your stay. lifetime.
Social Security benefits are calculated based on these four factors
America’s top pension program has some quirks, including the possibility of being taxed on your benefits at the federal and state levels, and the possibility of being penalized for taking your retirement benefits early. But when it gets down to the basics, there are four factors the Social Security Administration (SSA) will use to calculate your monthly benefit:
- Earnings history
- Work History
- Full retirement age
- Claim age
In general, the more you earn on average, the bigger your Social Security check will be in retirement. The SSA considers your 35 highest-earning, inflation-adjusted years when calculating your monthly benefit. The catch is that for every year that fewer 35 work, the SSA will include an average of $0 in your calculation. If you want to have any chance of maximizing your monthly Social Security payment, you must work for at least 35 years.
The third factor, your full retirement age, is completely out of your control. It is determined by the year you were born and represents the age at which you are eligible for 100% of your retired workers’ compensation benefits. Eligible beneficiaries born in 1960 or later have a full retirement age of 67.
The all-important fourth factor used to calculate your Social Security benefit is your claiming age. While earning more and working longer has the potential to increase your Social Security check, deciding when to receive your benefits can really swing the pendulum.
The interesting thing about Social Security claiming decisions is that the SSA encourages retirees to be patient. For each year that an eligible beneficiary does not receive their benefits, beginning at age 62 and continuing until age 69, their monthly check may increase by up to 8%, as shown in the table below.
year of birth | Age 62 | Age 63 | Age 64 | Age 65 | Age 66 | Age 67 | Age 68 | Age 69 | Age 70 |
1943-1954 | 75% | 80% | 86.7% | 93.3% | 100% | 108% | 116% | 124% | 132% |
1955 | 74.2% | 79.2% | 85.6% | 92.2% | 98.9% | 106.7% | 114.7% | 122.7% | 130.7% |
1956 | 73.3% | 78.3% | 84.4% | 91.1% | 97.8% | 105.3% | 113.3% | 121.3% | 129.3% |
1957 | 72.5% | 77.5% | 83.3% | 90% | 96.7% | 104% | 112% | 120% | 128% |
1958 | 71.7% | 76.7% | 82.2% | 88.9% | 95.6% | 102.7% | 110.7% | 118.7% | 126.7% |
1959 | 70.8% | 75.8% | 81.1% | 87.8% | 94.4% | 101.3% | 109.3% | 117.3% | 125.3% |
1960 or later | 70% | 75% | 80% | 86.7% | 93.3% | 100% | 108% | 116% | 124% |
What is the average Social Security benefit at age 65?
Something else you’ll probably notice from the table above is how much your monthly benefit can change depending on your ability and/or willingness to wait.
Future retirees born in or after 1960 who choose to receive their benefits as early as possible could see their monthly payout permanently drop by as much as 30%. Conversely, waiting eight years, after you become eligible, to claim your payout has the potential to increase your monthly payout by 24% to 32% above what you would have received at full retirement age, depending on your year of birth .
Due to these types of considerations, many retired employees opt for a middle-ground approach. In 2022, 65 was the fourth most popular claiming age, after ages 66, 62 and 67, in that order.
How big is the Social Security check the average retiree beneficiary will take home at age 65? According to SSA data, the 1,389,007 retired worker beneficiaries who received a monthly check took home an average of $1,504.98 in December 2022, for an annual run rate of about $18,060. Although the average monthly payout at age 65 is more than 15% higher than the average Social Security benefit at age 62, it is also 23% lower than the average retiree benefit at age 70.
Age 65 has traditionally been a popular age, especially since for decades it was the program’s full retirement age. Persons born in 1937 or earlier have a full retirement age of 65. While this no longer represents the program’s full retirement age, age 65 is still seen as a middle-ground compromise that allows beneficiaries to wait a few years while minimizing the permanent reduction. on their monthly payout.
Unfortunately, this middle-of-the-road approach can do more harm than good for the majority of retired workers.
The data doesn’t lie: early filers face an uphill battle
As previously noted, beneficiaries may be penalized if they receive their payout before reaching full retirement age. In addition to a permanently reduced monthly benefit, they may also be subject to the pension income test.
The retirement income test allows the SSA to withhold some or all of a retired worker’s benefits based on how much he earns. Although the retirement income test no longer applies once a worker reaches full retirement age, it may still surprise some early filers who thought they could generate a separate source of income while working.
The bigger problem is that an extensive study of retired Social Security worker claims has found that early filers face an uphill battle.
In 2019, United Income published the results of a study that examined the claims decisions of 20,000 retired workers using data from the University of Michigan Health and Retirement Study. The purpose of this study was to determine whether these beneficiaries were making an “optimal” claims decision. In other words, researchers extrapolated these claims to see if beneficiaries were generating the most possible lifetime income given their selection.
What United Income discovered was that actual claims decisions and optimal selections were almost perfect opposites of each other. Although most claimants chose to receive their Social Security benefits before reaching full retirement age, an overwhelming majority of recipients would have generated their highest lifetime income by waiting until or after their full retirement age.
More specifically, United Income found that 57% of filers would have made an optimal choice by waiting until age 70. Collectively, more than eight in 10 retirees would have generated the highest lifetime income from Social Security by waiting until ages 67 through 70.
By comparison, only a small, single-digit percentage of claimants surveyed by United Income would have made the right choice by taking their benefits at age 65. Although there are situations where a middle ground claim may make sense, based on your health and prenuptial agreement. status, the data shows quite convincingly that waiting until your full retirement age, or later, will be beneficial for a majority of future retirees.
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