Receiving Social Security is a rite of passage that most Americans alive have gone through or will go through at some point in their lives. It is a universally loved program that aims to ensure a decent retirement after a lifetime of working, and thanks to it, pensioners can have a good quality of life, as according to a Gallup poll, as many as 90% of retirees rely on their monthly payout to cover at least some portion of their monthly expenses.
So, what determines your Social Security benefits?
Mainly four key factors:
- Earnings history
- Work history
- Full retirement age
- Claiming age
The Social Security Administration (SSA) takes your 35 highest-earning, inflation-adjusted years into account when calculating your monthly benefits, but if you only have 20 years, it will still do the average with 35 and place 0s for the years you did not bring an income, or at least taxable income. This means that the higher your wages and the more years you have of those minimum 35, the more in benefits you will receive.
Your full retirement age also plays a role. For everyone born in or after 1960 their full retirement age is 67 years old, but the earliest benefits can be claimed is nowhere near that age. Eligible retired workers have the option of taking their payout as soon as they turn 62, but they can delay claiming as late as 70. The almost ten year gap between the ages is key when receiving benefits and the perks of each age can only be determined by the individual claimant.
Benefits and drawbacks of each claiming age
For those who started working early, had hard physical jobs and just cannot continue working because of illness or disability, this age is the optimal one. Time to heal and improve quality of life while still possible can be lifechanging for some workers. Plus, with the news of the demise of Social Security, they may feel like they need to retire and take some of the benefits before they are not available any longer. If they have savings, they may feel like those can continue accruing interests while they collect a check.
Full retirement age, which we will call 67, is the most logical for most. 100% of your benefits, a long career and still enough time to travel or maybe enjoy hobbies. Plus, as an added benefit, when workers with disabilities become their full retirement age, their disability benefits are automatically converted to retired-worker benefits.
Age 70 is the one most people are uncertain about. If you retire (or think about retiring) at 62, waiting 8 years to collect seems like a long time, but if you choose full retirement age as your target, working another three years or living off savings for a time may not be that much of a stretch. When considering this age, take into account that the average Social Security check at age 70 is 54% higher than at age 62.
Of course, the situation varies from person to person, and what someone would consider the optimal age to retire and collect benefits is too young for someone else. And although the monetary incentives are compelling, they are not the driving reason for most retirees to start the next chapter of their life. Whether or not we make the right decisions is something we will only find out years down the line, or after we pass and it is no longer relevant, so the only thing we can do is consider our options with care and make the best choice we can with the information we have.
However, it is worth noting that a comprehensive study published in 2019 by financial planning company United Income found that waiting until at least full retirement age is a better option that claiming early for most and that waiting until 70 was the best option for those interviewed. As we have said, hindsight is 20/20, and the best ultimate option is unknown.
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