Social Security isn’t just a financial supplement during the golden years for many Americans; it often becomes a vital economic support.
A recent Gallup poll revealed that between 80% and 90% of retired Americans rely significantly on this monthly income. Given this dependency, choosing the right time to start receiving retirement benefits is crucial not only to maintain a certain standard of living but also to optimize long-term benefits.
The formula for calculating Social Security benefits relies on four fundamental pillars that every worker should be aware of: earnings history, work history, full retirement age, and the age at which you start claiming benefits.
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Understanding the Basics of Social Security
These two factors are closely linked. The Social Security Administration (SSA) calculates the monthly benefit based on the worker’s 35 highest-earning years, adjusted for inflation.
This means that higher average earnings over these years result in a higher monthly check during retirement. It’s important to note that those who don’t have 35 years of work will see a reduction in their benefits since the SSA will include years with $0 earnings in the calculation.
Full Retirement Age
This is the one factor that a worker cannot change, as it is determined solely by the year of birth. Since the program’s inception, the full retirement age has ranged from 65 to 67 years. Understanding this is crucial because it defines the percentage of benefits received based on the age at which you start claiming retirement.
Although benefits can begin at age 62, there are financial incentives to wait. For each year retirement is delayed up to age 70, benefits increase by about 8% annually.
Pros and Cons of Retiring at 62 or 67
Each option for starting retirement comes with specific advantages and disadvantages, making the decision highly personal and dependent on individual circumstances.
Retiring at 62
Choosing early retirement allows for immediate access to benefits, which can be appealing for those who need income right away or fear potential future cuts in benefits. However, this option results in a permanent reduction of between 25% and 30% of the monthly benefit compared to what would be received at full retirement age.
Moreover, if you continue to work and earn above certain thresholds, the SSA can withhold part or all of your benefits, adding complexity to this option.
Retiring at 67
This age is becoming increasingly popular, especially for those born in 1960 or later, for whom it is the full retirement age. Opting for this age allows for the receipt of 100% of the calculated benefit, maximizing monthly income without penalties.
However, waiting until age 67 carries a risk: if life expectancy significantly extends, individuals might regret not having started to collect earlier to enjoy their money for a longer period.
Study on Optimizing Social Security
A detailed study conducted by United Income analyzed 20,000 cases of retirees to determine the optimal age for claiming benefits to maximize lifetime benefits. Although most began claiming early, the study found that only 4% chose the age that maximized their lifetime benefit. Interestingly, while 79% of retirees started claiming between ages 62 and 64, only 8% would maximize their benefits within this age range.
The study also revealed that 57% of workers would have maximized their benefits had they started claiming at age 70. Age 67 emerged as the second most optimal, demonstrating that patience often translates into greater lifetime income.
Deciding when to start claiming Social Security benefits is a complex decision that must take into account many personal factors, including health, marital status, and other financial resources. There isn’t a one-size-fits-all answer, but understanding how the system works and the implications of different retirement ages can help make an informed decision that maximizes benefits during retirement.