For many seniors, the most important decision they'll make is deciding when to begin taking their retirement benefit from Social Security. That's because, according to the Social Security Administration (SSA), 62% of retired workers currently lean on their benefit to account for at least half their monthly income, with just over a third reliant on the program for virtually all of their income.
Unfortunately, this often isn't a cut-and-dried decision, because there is no perfect guide to ensure you'll make the best possible choice.
Although benefits can begin at age 62 for retired workers, that may not be the best time to begin taking them. For each year you wait on taking benefits, your eventual payout grows by about 8%, up until age 70. All things being equal -- earnings history, work history, and birth year -- those taking benefits at age 70 could earn as much as 76% more per month than individuals taking their benefits as soon as they turn 62.
This idea that waiting to take your payout can boost your eventual take-home from Social Security is powerful. It's a big reason behind a growing number of people waiting until their full retirement age (FRA) -- or perhaps even longer -- to begin taking their benefit.
Your full retirement age is the age at which the SSA deems you eligible to receive 100% of your payout, as determined by your birth year. For most people, full retirement age will be 66, 67, or somewhere in between. Claiming benefits at any point before that means accepting a permanent reduction to your monthly payout, whereas waiting until after your FRA can increase your benefit above 100%.
Claiming at 70 might not be the best idea
Although a larger monthly payout probably sounds great -- and for some people, it truly is the best decision they can make – there are a number of reasons that waiting until 70 and maximizing your monthly benefit is a mistake.
1. You may not make it to your claiming age
For starters, there's no guarantee that you'll live to see age 70. Don't get me wrong: We've seen a growing number of Americans living long enough to claim a Social Security benefit. And those who do make it to 65 are living an average of about two decades longer. But these are averages, and everyone's personal health situation is unique.
If you have a chronic condition, such as heart disease or diabetes, or have dealt with cancer, longevity data shows the deck is stacked against you to outlive the average life expectancy in the United States of just over 78 years. Waiting until age 70 would mean giving up as many as eight years in which benefits could have been collected, albeit at a reduced rate. If you take your payout at age 70 and don't wind up living to around 80 years old, the lifetime benefits you accrue from the program could be lower than what you'd have received had you begun taking a reduced payout at age 62.
Again, I want to reiterate that since we (thankfully) don't know our expiration date, choosing when to take benefits based on our health, and the longevity of our immediate family members, can be a bit of crapshoot. Nevertheless, waiting until age 70 offers no guarantee that you'll be maximizing your lifetime benefits from the program, even though you'll be maxing out your monthly payout.
2. A higher monthly payout may not be optimal
Believe it or not, for some people, it may not be optimal to receive a larger monthly payout by waiting until age 70.
As an example, if you're in your mid-60s and still contending with quite a bit of debt, you'd rather have the opportunity to pay down that debt and attack its principal, and not allow interest to continue compounding over time. Taking a payout earlier than age 70 can, in some instances, allow seniors to really make a dent in their debt (in combination with working wages) and give them an opportunity to enter their retirement debt-free. But remember to be mindful of the retirement earnings test.
Likewise, wealthy individuals may be in better shape by taking their payout as early as possible. The rich aren't likely to rely on their Social Security payout in any way, but they're far likelier than low- and middle-income Americans to pay tax on a portion of their Social Security benefits during retirement. By claiming early, the wealthy would be reducing their payout from the program, thereby minimizing their tax liability.
3. Significant benefit cuts are on the horizon
Lastly, working Americans looking to take benefits in the window of the next five to 15 years really need to be aware of the potential for Social Security payouts to be cut in the future.
According to the latest Social Security Board of Trustees report, the program is slated to begin paying out more than it collects in 2020, with this net-cash outflow widening each year thereafter. By the time 2035 rolls around, the nearly $2.9 trillion in asset reserves currently in Social Security's coffers could be completely exhausted, at which point a benefit cut of up to 23% could be passed along to retired workers.
While it's possible that Congress comes to the rescue of the program, as it did in 1983, it's important to realize that lawmakers have known for more than three decades about this imminent cash shortfall -- and they've done nothing. That means folks who wait until age 70 to begin taking benefits will be giving up eight years of collection eligibility. Then, shortly after beginning to take their maxed-out monthly benefit, they could be hit with a benefit reduction of as much as 23%.
Although we don't know how Congress will respond to Social Security's imminent cash shortfall, the possibility of a benefit cut may rightly entice early claims among American workers.
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