Despite their best plans, millions of Americans end up relying on Social Security to some extent. According to one poll from Gallup, Social Security payments were expected to be ‘necessary’ for nearly nine in every ten; this is the highest percentage since the poll began at the beginning of the millennium.
Considering its importance, it’s surprising that more people aren’t asking when they should start claiming.
How Does Social Security Work?
How much money will you receive every month from Social Security? There are lots of factors that determine the answer to this question, but perhaps four are more important than others:
• Work history
• Earnings history
• Birth year
• Claiming age
The first two are interlinked. For example, for earnings, the Administration will consider the years with the highest earnings (adjusted for inflation) to calculate the monthly benefit. If you don’t reach 35 years of employment, this is considered in the calculation.
From here, your full retirement age all depends on when you were born. In case you’re unaware, ‘full retirement age’ means you can get 100% of your monthly benefit without penalty. If you claim before this age, you will never reach your potential monthly benefit amount.
When you wait to claim past the full retirement age, it’s possible to get more per month, as the money is split over a shorter period. With Social Security, the majority of people can start claiming at 62 years of age. However, the amount you receive in monthly benefits increases for every year you wait. You’ll need to claim at 70, but the yearly increase when waiting can reach 8%.
Typical Benefits for a 62-Year-Old
With the advantages that waiting brings, is this the most common strategy for retirees? Interestingly, around six in ten start claiming before full retirement age, and the most common age to start claiming is 62. In these statistics, those transferred from disability benefits to retired worker benefits at 66 are excluded because it only considers those with a choice.
If you’re following a similar path to those before you, it’s essential to know what the average American gets when claiming at 62. According to the Social Security Administration, the average sat at $1,130 per month in June 2020. Considering the average retired-worker benefit was $1,514, this is much lower (it’s also within $800 of the single household poverty line over a year).
When choosing a claiming age, it’s a delicate balance between getting payments early and permanently reducing monthly benefits. Many people’s problem is that they’re forced into the latter because they lack other income sources. Elsewhere, we’ve spoken to people who claim early to make up for a low-earning spouse. However, without a doubt, the most problematic and avoidable cause of early claiming is a lack of knowledge/understanding.
Benefits of Waiting to Claim
In some cases, claiming early is a good decision; this is true if your lifetime income is lower than your spouse or if your life expectancy is low due to health issues. This being said, most people would benefit from waiting to claim Social Security.
Last year, a study from United Income caused a stir when it discovered that fewer than one household in ten chose to start claiming at what was considered an ‘optimal’ time. In around 57% of cases, the optimal time to claim would have been 70 rather than between 62 and 65. For eight of ten people, they would have been better off waiting until at least 67. By waiting, there’s an opportunity to earn more money throughout retirement.
If you’re currently weighing up the decision, bear in mind that claiming before your full retirement age could harm your spouse. Especially for high-earning individuals, claiming early and passing first will reduce the amount that your spouse receives. If you wait, the survivor benefit isn’t reduced, and your partner has more money to continue their standard of living.
While claiming at 62 is a common option, it’s very rarely the right choice. Consider the pros and cons of deciding what’s right for your financial position!