Social Security is a program that most retirees couldn't live without. According to the Center on Budget and Policy Priorities, this leading program pulled 22.7 million people above the federal poverty line in 2022, including 16.5 million adults aged 65 and over. It's singlehandedly responsible for reducing the poverty rate for seniors from an estimated 38.7% without the program to just 10.2% with guaranteed monthly payouts.
Annual surveys from national pollster Gallup add relevance of just how critical Social Security income is to the financial foundations of retired workers. Over the previous 22 years, between 80% and 90% of then-retired workers have responded that their Social Security check is a "major" or "minor" source of income.
For future retirees, getting as much as you can out of Social Security will be imperative to your financial well-being. But in order to maximize what you'll receive from America's top retirement program, you first have to know the basics of how benefits are calculated, as well as gain an understanding of just how important your claiming age can be.
This can make all the difference in deciding whether a middle-ground claiming approach at age 65 is a wise move.
Image source: Getty Images.
These four puzzle pieces are used to calculate your Social Security check
Although some aspects of Social Security can surprise retirees -- did you know a portion of your Social Security benefits may be taxed at the federal level, as well as in 10 states? -- the four puzzle pieces used by the Social Security Administration (SSA) to calculate your monthly check are easy to understand:
- Work history
- Earnings history
- Full retirement age
- Claiming age
Your work history and earnings history are interwoven. The SSA will factor in your 35 highest-earning, inflation-adjusted years when calculating your monthly Social Security benefit. Thus, if you earn a higher wage or salary (investment income doesn't count as "earned income") during your lifetime, you'll likely receive a larger Social Security check during retirement.
The caveat is that you'll be penalized by the SSA if you work less than 35 years. For every year less of 35 worked, the SSA will average $0 into your calculation, which will undoubtedly drag down your eventual payout.
The third component, your full retirement age, represents the age you become eligible to receive 100% of your monthly benefit. Since it's based entirely on your birth year, it's the only one of the four puzzle pieces you can't control. A majority of today's labor force has a full retirement age of 67.
The fourth factor, and the one that can make all the difference from a financial standpoint during retirement, is your claiming age. Though retired-worker beneficiaries have the option of claiming their Social Security payout as early as age 62, the program dangles a monetary incentive to those who are willing to exercise patience. For every year an eligible worker waits to claim their payout, beginning at age 62 and continuing through age 69, their monthly benefit can increase by as much as 8%.
The dynamics of waiting can be seen in the table.
| Birth Year | Age 62 | Age 63 | Age 64 | Age 65 | Age 66 | Age 67 | Age 68 | Age 69 | Age 70 |
| 1943-1954 | 75% | 80% | 86.7% | 93.3% | 100% | 108% | 116% | 124% | 132% |
| 1955 | 74.2% | 79.2% | 85.6% | 92.2% | 98.9% | 106.7% | 114.7% | 122.7% | 130.7% |
| 1956 | 73.3% | 78.3% | 84.4% | 91.1% | 97.8% | 105.3% | 113.3% | 121.3% | 129.3% |
| 1957 | 72.5% | 77.5% | 83.3% | 90% | 96.7% | 104% | 112% | 120% | 128% |
| 1958 | 71.7% | 76.7% | 82.2% | 88.9% | 95.6% | 102.7% | 110.7% | 118.7% | 126.7% |
| 1959 | 70.8% | 75.8% | 81.1% | 87.8% | 94.4% | 101.3% | 109.3% | 117.3% | 125.3% |
| 1960 or later | 70% | 75% | 80% | 86.7% | 93.3% | 100% | 108% | 116% | 124% |
Data source: Social Security Administration. Table by author.
What's the average Social Security benefit at age 65?
Within the traditional claiming age range of 62 through 70, the payout pendulum can swing wildly. If benefits begin at age 62, your monthly payout can be permanently reduced up to 30%, depending on your birth year. Meanwhile, your monthly Social Security check can increase by up to 32%, compared to what you'd have received at full retirement age, if claimed at age 70, depending on the year you were born.
With a better understanding of how important your claiming choice can be, let's get back to the topic at hand and determine whether a middle-of-the-road claim at age 65 would make sense for future generations of retired workers.
Recently, the SSA's Office of the Actuary updated a data set on average monthly retired-worker benefits by age. Be mindful that this average is based on the age of the recipient, as of December 2023, and isn't necessarily indicative of their claiming age. Thus, retired workers aged 65 may have chosen to begin receiving their payout anywhere from ages 62 through 65.
According to the Office of the Actuary, the average retired-worker beneficiary at age 65 brought home $1,563.06 in December, which works out to about $18,757 on an annual run-rate basis. For context, this is about 20% more per month than retired-worker beneficiaries are receiving at age 62, and roughly 23% less per month than the $2,037.54 retired-worker beneficiaries received at age 70.
The draw of an age 65 claim is that it allows retirees to get their hands on their benefit while they're still young enough to enjoy it. By patiently waiting three years post-eligibility, retired workers can limit their permanent monthly payout reduction to between 6.7% and 13.3%, depending on their birth year.
Age 65 has a psychological lure as well. For decades, anyone born in or before 1937 had a full retirement age of 65.
The downside to be aware of with an age 65 claim is that it can expose retirees to early filer penalties, which include permanently reduced monthly checks and the potential for partial or full benefit withholding by the SSA.
Image source: Getty Images.
The "middle-ground approach" may be shortchanging retired workers
With a clearer understanding of how benefits are calculated, what the average payout is at age 65, and the advantages and drawbacks associated with an age 65 claim, let's tackle the topic at hand: Does an age 65 claim make sense for future retirees?
To answer this question, let's turn to an exhaustive study ("The Retirement Solution Hiding in Plain Sight") released five years ago by the researchers at online financial planning and wealth management company United Income.
The researchers at United Income sought to answer the age-old question of whether a "best" claiming age exists. They approached this topic by utilizing data from the University of Michigan's Health and Retirement Study and extrapolated the claiming decisions of 20,000 retired workers. Their purpose was to determine how many of these retired workers made an optimal decision -- "optimal" being the choice that maximized the lifetime (key word!) benefits received.
As should be no surprise, researchers found that only 4% of the 20,000 claimants examined made an optimal choice. Without knowing our "expiration" date ahead of time, there's always going to be some degree of guesswork involved when claiming benefits.
The more telling finding from United Income is that actual claims and optimal claims were near-perfect inverses of each other. While an overwhelming percentage of actual claims were made prior to full retirement age, the bulk of optimal claims were determined to have occurred at or after full retirement age. In simpler terms, most retirees are leaving Social Security income on the table.
For instance, researchers found that claims made at ages 62, 63, and 64 would have been optimal for only 8% of retired workers on a combined basis! Ages 62 through 65 (not in this order) were least likely to maximize lifetime benefits, according to the study.
On the other end of the spectrum, United Income's report showed that 57% of claimants would have maximized their lifetime payout by waiting until age 70 to begin receiving benefits. In order, the four ages that were most likely to optimize lifetime benefits were 70, 67, 69, and 68.
Because everyone's situation is unique, there will be scenarios where a middle-ground claim at age 65 makes sense for future retirees. But when examined as a whole, waiting is liable to be a more fruitful choice for a majority of workers.
