For better or worse, Social Security is the nation's most important social program. With more than 62 million current recipients, Social Security is responsible for keeping an estimated 22.1 million of these folks above the federal poverty line each and every month, based on an analysis from the Center for Budget and Policy Priorities.
Furthermore, 62% of current retirees lean on their monthly payout to provide at least half of their income, with just over a third (34%) reliant on the program for virtually all of their income (90% to 100%). Because of this reliance on Social Security, there may be no single decision that's more important to seniors than deciding when to claim Social Security benefits.
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Here’s what determines your Social Security payout
As a refresher, Social Security benefit payments have four primary influencers, the first two of which are tied at the hip: your work and earnings history. When calculating your benefit at full retirement age, the Social Security Administration will take into account the 35 highest-earning, inflation-adjusted years. This means you're incentivized to earn as much as you can when you are working, and to work a minimum of 35 years, if not longer, if you want an opportunity to maximize what you'll receive from Social Security.
The third factor affecting your payout is your birth year. Your birth year determines your full retirement age, or the age at which you become eligible to receive your full retirement benefit. In the simplest terms, claiming benefits at any point prior to reaching your full retirement age will result in a permanently reduced monthly payout. Likewise, claiming afterward could add to your monthly benefit.
The fourth and final factor — and arguably the biggest wild card of the group — is your claiming age. Retired worker benefits can begin at age 62, or any point thereafter, so long as you've earned the 40 lifetime work credits needed to receive a benefit. But here's the catch: The longer you wait, the higher your benefit will be, up to a point. Beginning at age 62, and continuing until age 70, your retirement benefit will grow by 8% per year. All things being equal (i.e., work history, earnings history, and birth year), an individual claiming benefits at age 70 could earn as much as 76% more per month than the person claiming at age 62.
Taking Social Security at 70 is no slam dunk
Though this last point would appear to be a slam-dunk reason to wait to claim Social Security benefits — and trust me, there are plenty of excellent reasons to wait — there are three potential disadvantages to claiming at age 70 that future retirees need to be aware of.
1. We don’t know our expiration date
One of the biggest disadvantages we face when claiming Social Security is that none of us knows our expiration date. We can take into account our personal health history, as well as that of our immediate family, but we can't know in advance when it's our time to go. Thus, we can't know with any certainty if we're making the best possible claiming decision.
If you decide to wait until age 70 to take your retired worker benefit, you'll absolutely be maximizing your monthly benefit from the program. However, this doesn't guarantee that you'll be maximizing your lifetime payout from Social Security. If, as an example, an individual claiming at age 70 lives for only five more years, he or she would actually have netted a higher lifetime payout from the program, albeit a lower monthly payout, if claiming at age 62.
2. You’ll have to make do for eight years without added income
Secondly, if you decide to take your benefit check at age 70, you'll have to find a way to make do with your existing income and nest egg for up to eight years (since retired worker benefits can be claimed as early as age 62).
Now, to be fair, the retirement earnings test comes into play for those seniors who've decided to take benefits early, prior to reaching their full retirement age. This could result in the withholding of some, or all, prospective benefits until these individuals reach their full retirement age.
Still, the added income derived from claiming benefits before age 70 could be used to pay down debt, or might be best suited for investment in the stock market, which has historically returned 7% per year, inclusive of dividend reinvestment, and when adjusted for inflation. By waiting, retirees run the risk of failing to pay off their debts, and would be giving up eight years of potentially compounded gains in the stock market.
3. Benefit cuts could be looming
Last, but not least, there's the very real prospect that benefit cuts may be looming.
According to the newest annual report from the Social Security Board of Trustees, the program is set to hit an inflection point this year that sees it expend more than it collects for the first time in 36 years. This net cash outflow, while small now, should grow considerably in 2020 and beyond. By the time 2034 rolls around, the report projects that the nearly $2.9 trillion currently held in asset reserves will be completely gone. Should Congress fail to generate additional revenue and/or cut expenditures to avoid this mess, an estimated across-the-board cut to benefits of up to 21% may be needed to sustain payouts through 2092.
In plain English, Social Security isn't going to go bankrupt, but its current payout schedule isn't sustainable. Choosing to wait to claim benefits, assuming you'll be hitting age 70 within, say, the next 10 to 15 years, might not be a smart decision if your benefits are reduced just a few years later. Instead, accepting a permanent monthly reduction upfront, but being able to receive up to eight years of benefits that aren't further reduced, may be the better option.
As always, deciding when to claim is a personal decision. Just know that waiting isn't always going to be the best option.
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