In October 2022, nearly 65.9 million people received Social Security benefits. A majority of these recipients – 48.39 million to be exact – are retired employees, for whom the program was designed in the 1930s.
For many of these retired workers, Social Security income isn’t just a check. It is an essential part of their monthly income needed to make ends meet. When the national poll poll Gallup surveyed retirees earlier this year, it found that 55% consider their monthly payout a “major” source of income, while a total of 89% of respondents relied on some degree to cover their expenses.
Given the importance of Social Security to current retirees and the expected role it will play for future generations during the golden years, it is imperative to get the most out of Social Security.
Four main inputs determine how your Social Security benefit is calculated
While there are more than half a dozen factors that can affect what retired Social Security workers take home, four of these factors stand head and shoulders above the rest.
For starters, a person’s employment history and income history go a long way in determining what their Social Security benefits will be at full retirement age. The Social Security Administration (SSA) takes into account a worker’s 35 highest-earning, inflation-adjusted years when calculating their monthly benefit. For every year that fewer than 35 people work, the SSA averages out to $0, which can really lower an employee’s retirement benefit.
Next to work history and income history, the third important factor is a person’s year of birth. Your year of birth is what helps determine your full retirement age – ie the age at which you qualify for 100% of your monthly retirement benefit. Without getting too deep into the weeds (because I’ll go into more detail on this in a moment), claiming benefits before your full retirement age will result in a permanently reduced monthly payout. Likewise, waiting past your full retirement age can increase your monthly benefit above 100%.
The fourth and last all-important factor is claiming age. While no one can control when they are born, they do have the option to choose when they receive their Social Security benefits. As you’re about to see, that choice could have some big dollar implications.
This chart can determine your financial well-being in retirement
As I mentioned back in the summer, the Social Security age table has the potential to determine your financial well-being in retirement.
The main takeaway between Social Security income and claiming age is that retirees are incentivized to wait to take their monthly benefits. Depending on their year of birth, a qualifying retiree can see their monthly benefit grow by as much as 8% per year, until age 70, for every year they patiently sit on their hands. This means a very large difference in possible monthly benefit outcomes between the first eligible age (62) and the age at which benefits stop accruing (70).
|year of birth||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%|
What you see in the table above is visual proof of how patience can be rewarded with Social Security. For example, according to the SSA, the average retired worker received $1,676.53 in October. If we were to use this as an arbitrary example of a full retirement age payout, the difference between claiming early and waiting until age 70 is staggering. For those born between 1943 and 1954, an early claim would equate to a permanent reduction of $419.13/month. Meanwhile, claiming at age 70 would add $536.98/month. That’s a $955.62 monthly difference, or roughly an $11,500 annual swing in Social Security income.
For those born in 1960 or later, it’s much of the same. Claiming early would result in a permanent 30% reduction on your payout, which equates to $502.96/month. On the other hand, holding out until age 70 before claiming your benefit can increase your benefit by $402.37/month. That’s a difference of $905.33/month, or nearly $10,900 per year.
Given this large difference in annual payouts, you’re probably wondering why more retirees aren’t waiting to receive their benefits. The answer is because claiming age is often a bit of a mess. While a large monthly benefit sounds great, the ultimate goal should be to increase your lifetime benefits from the program. It is sometimes useful to collect your benefits early.
With the understanding that everyone’s situation will be unique, people with chronic health problems or who want to reduce their debt burden may be incentivized to withdraw their Social Security benefits early. Conversely, retirees who plan to rely on Social Security as their primary source of income, or who believe they are in good/excellent health, may choose to wait and allow their payout to grow over time.
Regardless of your choice, this Social Security table can go a long way in helping you determine how financially healthy you’ll be in retirement.