Since the first Social Security check was issued in 1940, the American retirement landscape has changed dramatically. Traditional pensions have largely disappeared, and Americans are now responsible for building their retirement savings through options like 401(k)s and IRAs.
Amid these changes, Social Security has become an essential source of income for many retirees. According to a recent Gallup poll, nearly 60% of retirees rely heavily on Social Security, underscoring the importance of optimizing these benefits.
In this article, we’ll look at some important Social Security quirks and strategies to help retirees get the most out of their benefits.
Impact of Claim Age
Social Security was originally designed to provide similar lifetime benefits, whether claimed early or late. But in 1983, reforms adjusted monthly benefits to reflect life expectancy estimates at the time. Now, the age at which you choose to claim Social Security has a lasting effect on your monthly benefit amount.
The Full Retirement Age (FRA) varies based on birth year:
- Age 66 for those born between 1943 and 1954.
- Gradually increases to 67 for those born after 1954, reaching 67 for anyone born in 1960 or later.
For example:
- Claiming at age 62 results in a permanent reduction in monthly benefits.
- Delaying until age 70 offers the highest possible monthly payout.
However, waiting until 70 means forgoing benefits for several years, so understanding when you might “break even” is crucial. Breakeven ages indicate when someone who delayed claiming Social Security starts receiving more in total benefits than if they had claimed earlier.
Evaluating the Breakeven Age
To determine the best time to claim, it’s helpful to calculate your breakeven age—the age at which you’ll receive more by delaying than if you had claimed earlier. The Centers for Disease Control and Prevention (CDC) provides updated life expectancy tables, which help in these calculations.
Here’s a breakdown of general breakeven ages:
- For those who claim at 62 versus 66 (full retirement age for many), the breakeven age is often around 78 to 80.
- For those who delay until 70, the breakeven age may fall closer to 82 to 85, depending on their earnings record and expected longevity.
The CDC’s recent data shows that a 62-year-old retiree today may benefit from delaying their claim beyond full retirement age. By age 65, delaying further tends to offer even more financial benefit, especially as the average life expectancy continues to rise.
Factoring in Life Expectancy
Average life expectancy varies, and personal health plays a significant role in deciding when to claim Social Security. Currently, a 70-year-old has an average life expectancy of 85 years and four months. Those who live longer than average stand to benefit more from delaying their claim, as monthly payments are higher.
Consider these factors:
- Health Status: For retirees with health concerns or a family history of shorter lifespans, it might be advantageous to claim earlier.
- Financial Needs: Some may need to claim sooner due to immediate income needs, despite the potential for lower lifetime benefits.
- Life Expectancy Trends: Though the COVID-19 pandemic caused a temporary decline in life expectancy, historically, life expectancy has generally increased, which was a factor behind the 1983 reforms encouraging later retirement.
Social Security Adjustments
The primary insurance amount (PIA), calculated based on a person’s highest 35 years of earnings, is used to determine monthly Social Security benefits. While the SSA’s structure aims to provide equitable lifetime benefits, waiting until closer to age 70 generally leads to higher total benefits, especially for those with average or above-average life expectancies.
For example, a retiree who delays Social Security until 70 could receive a maximum benefit of approximately $4,873 monthly, compared to about $3,822 if they claim at full retirement age (FRA) or $2,710 if they start at 62. These numbers demonstrate the power of delaying benefits, assuming good health and financial flexibility.
Future Planning
For retirees aiming to make the most of Social Security, these guidelines can be helpful:
- Review your PIA and consider your expected lifespan based on health and family history.
- Calculate your breakeven age to understand when delayed benefits outweigh earlier claims.
- Consider the effect of COLA (Cost of Living Adjustments), which can increase benefits even further the longer you wait.
The decision of when to claim Social Security is highly personal and depends on health, finances, and retirement goals. By staying informed and weighing options carefully, retirees can optimize Social Security to secure a more comfortable future.
FAQs
What is the Full Retirement Age (FRA) for Social Security?
The FRA is 66 for those born 1943-1954, rising to 67 for those born in 1960 or later.
How does claiming Social Security at 62 affect benefits?
Claiming at 62 reduces monthly benefits permanently compared to waiting until FRA.
What is the benefit of delaying Social Security until age 70?
Delaying until 70 maximizes monthly payouts, though you forgo benefits until then.
How is Social Security’s breakeven age calculated?
The breakeven age is when delayed benefits exceed the total of earlier claims.
How can health affect Social Security claiming decisions?
Shorter expected lifespans may make early claiming more beneficial.
