Maximizing your Social Security benefits can make your retirement a lot more comfortable, but you need the right approach to pull it off. Taking steps to boost your income during your working years is a smart move for everyone. But other decisions, like when to apply for benefits, depend on individual factors.
However, there is one claiming age that's generally more favorable than the others. In fact, it could increase your lifetime discretionary spending by $182,370, according to a recent study. Below we'll talk about what it is, and how to decide if it's the right choice for you.
Image source: Getty Images.
How your claiming age affects your benefit
You become eligible for Social Security at 62, but you must wait until your full retirement age (FRA) -- 66 to 67 for today's workers -- if you want the full benefit you've earned based on your work history. This is known as your primary insurance amount (PIA). But a lot of people don't want to wait that long for their checks.
When you apply earlier, the Social Security Administration reduces your benefit. You lose 5/9 of 1% per month for your first 36 months of early claiming and 5/12 of 1% for every additional month of early claiming beyond that. That translates to a reduction of 25% to 30% for those who apply right away at 62, depending on their FRA.
More optimistically, you could say that every month you delay Social Security increases your checks -- and that doesn't stop at your FRA. You can continue to wait and you'll gain 2/3 of 1% per month every month until you turn 70. That's when you qualify for your maximum benefit. It's 124% of your PIA if your FRA is 67 or 132% if your FRA is 66.
How to decide when you should claim Social Security
Those with little to no savings who are forced into an unplanned retirement may need to claim Social Security as soon as possible to help with their bills. And those with short life expectancies risk losing out on benefits entirely if they die before they're able to apply. But for most people, delaying Social Security appears to provide the largest lifetime benefit.
Virtually all workers between 45 and 62 should wait until at least 65 to collect Social Security if they hope to maximize their lifetime benefits, according to a report by the National Bureau of Economic Research. It also found that more than 90% of workers would get the largest possible benefit by waiting until 70 to apply. Yet only about 10% of workers actually pull this off.
This could be because there's more than life expectancy to think about when choosing a claiming age. If delaying Social Security would threaten your present financial security, it's not worth it, even if you would get a larger lifetime benefit. But if you can afford to delay, it's an option worth considering.
You'll need a plan for how you'll cover your living expenses until you're ready to apply. This could involve working longer, or you might save a little more in your retirement accounts. You could also try a bit of both.
If waiting until 70 isn't feasible, you could always settle for a middle ground, like waiting for your FRA. Even delaying benefits for a few months or a year can permanently grow your benefit checks. For example, if you qualify for a $1,500 benefit right away at 62, you'll be eligible for a $1,575 check at 63. That's a $900 annual gain just from waiting one year.
Think about what's feasible for you and choose a tentative claiming age for now. But don't be afraid to adjust it down the road if your retirement plans change. Keep an eye out for changes to Social Security itself too, as this may also affect when you want to claim benefits.
