Social Security serves as a key source of income for 43 million American retirees. To make the most of those benefits, you need to be strategic about when you file for them. Eligible beneficiaries get an eight-year window to claim Social Security. You can start collecting benefits as early as age 62 and as late as age 70 . And, of course, you can file at any age between 62 and 70, including your full retirement age , which, depending on when you were born, is either 66, 67, or somewhere in between.
There are advantages and drawbacks to filing at these various ages, so determining when to take benefits can be challenging. Here, we'll walk you through your options to help you land on the right age to claim Social Security .
Who's eligible for Social Security?
To be eligible for Social Security retirement benefits, you'll need to earn 40 " credits " throughout your career. For 2018, you'll get one credit for every $1,320 in earnings you receive. For 2019, you'll receive one credit per $1,360 in earnings. Once you have those 40 credits, you can start collecting benefits as early as age 62 . Furthermore, if you never worked but are married to someone who's eligible for Social Security, you can generally receive spousal benefits based on your spouse's work record. The same holds true, in some cases, if you were once married to someone who's eligible for Social Security but are now divorced or if you're the surviving spouse of someone who's entitled to Social Security benefits. Other family members, like children or parents of an eligible beneficiary who passes, might be entitled to survivor benefits as well.
How are Social Security benefits calculated?
Your Social Security benefits are calculated based on your income during your 35 highest-earning years. If you don't manage to work for 35 years in your lifetime, you'll get a $0 factored into your personal benefit calculation for each year you fall short of 35. This can significantly reduce your retirement benefit.
There is a maximum Social Security benefit that anyone can receive. That's because there's a limit to how much income is subject to the payroll tax that funds Social Security. For 2018, only your first $128,400 of earnings are subject to Social Security taxes. For 2019, this threshold is increasing to $132,900. Given that there's a limit to how much you can pay into Social Security through the payroll tax, there's also a limit to how much the program can pay you.
To qualify for the maximum benefit, you would have to earn the maximum amount of income that's subject to the payroll tax for at least 35 years. For 2018, the maximum Social Security benefit is $2,788 per month at full retirement age. For 2019, it's $2,861 a month at full retirement age. However, folks who wait to file for benefits past full retirement age can accrue delayed-retirement credits to push 2019's maximum benefit up to $3,770 per month.
While your Social Security benefits themselves are calculated based on your earnings history, the age at which you first file for them can cause that number to go up, go down, or stay the same. If you file at full retirement age , you'll get the full monthly benefit your earnings record entitles you to -- not more, but not less. Your full retirement age is based on your year of birth, as follows:
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.
If you claim benefits ahead of full retirement age, however, you'll reduce them by about 6.67% a year for the first three years you file early, and 5% a year for each year thereafter (though keep in mind that your benefits go down for each individual month you file early; reductions aren't rounded to the nearest year). This means that if your full retirement age is 67 but you claim benefits at 62, you'll lower your monthly payments by 30%. And unless you manage to withdraw your application to file again at a later point in time, that reduction will remain in effect for the rest of your life.
On the flip side, if you hold off on filing for benefits past your full retirement age, you'll increase them by 8% a year up until you turn 70. This means that if your full retirement age is 67, filing at 70 will result in a 24% increase.
To better illustrate the way your age can impact the amount you receive in benefits, check out the following table, which assumes a full retirement age of 67 and a full monthly benefit of $1,500 at that age:
TABLE BY AUTHOR.
As you can see, in this example, there's a $9,720 difference in annual income between filing for benefits at 62 and waiting until 70. And that's something to think about.
What's the best age to file for Social Security?
Deciding when to file for Social Security is tricky. If you file early, you'll get your money sooner, but your monthly payments will be cut as a result. If you file on time (meaning at full retirement age), you won't face a reduction in benefits, but you won't get them as early as you would by claiming at 62. And if you file after full retirement age, you'll boost your benefits , but you'll have to wait even longer to see them hit your bank account.
So what age should you choose? Let's go through your options.
Claiming Social Security at age 62
Age 62 is the earliest age at which you can start collecting Social Security, and as such, it's the most popular age to file . The biggest argument in favor of claiming benefits at 62 is that you'll get access to your money as soon as possible. You'll have extra cash to pay bills, travel , or use in whatever manner you please. There's also the option to take benefits early and invest them so they grow into a larger sum. However, if that's your plan, just remember that any time you invest money, you run the risk of taking losses, whereas when you wait to collect Social Security, you guarantee yourself a larger monthly payment on an ongoing basis.
Imagine you decide to file for Social Security early and invest that money in stocks. If the market has a few good years, you might see a 9% average annual return, which is roughly in line with its historical average. Given that you'll only lose 6.67% a year in benefits for the first three years you file early, and 5% a year for each year thereafter, taking that sort of hit to potentially gain 9% might seem worthwhile. But keep in mind that a 9% return is a far more achievable result over the course of decades, rather than a few years. When you invest on a short-term basis, you might easily have a year where your investments earn just 2% or even lose money. Meanwhile, if you hold off on filing for Social Security until your full retirement age, as opposed to rushing to file at 62, you're guaranteed to "gain" 30% over that five-year period.
The problem with claiming Social Security at 62 is that doing so will reduce your benefits, and quite possibly for life. In fact, the only way you won't face a permanent benefits reduction is if you undo your application within a year of filing and repay whatever money you've collected to the Social Security Administration. Then you can continue to delay benefits as if you had never claimed them in the first place. But barring that, if you file at 62, the monthly benefit you lock in will be the amount you collect for as long as you live, which means you could end up reducing one of your largest retirement income streams (if not the largest) by going this route.
Claiming Social Security at age 63 or 64
Though age 63 isn't a particularly popular age to file for Social Security, it's an option nonetheless. If you file for benefits at 63, you'll face a reduction by virtue of claiming ahead of full retirement age, but that reduction won't be quite as severe as it would be at 62. Using our example, a $1,500 monthly benefit at 67 would become a $1,125 benefit at 63.
As is the case with filing for benefits at 62 or 63, claiming Social Security at 64 means slashing your monthly payments. In this case, you're looking at about a 20% reduction if your full retirement age is 67. Going back to our example, this would turn a $1,500 monthly benefit into $1,200. Clearly, that's more money than you'd get at 62, but not nearly as much as you'd get at 67.
Claiming Social Security at age 65
Many seniors assume they should file for Social Security at 65 because that's the age that Medicare eligibility kicks in. But while the two programs are interrelated, there's absolutely no requirement to sign up for both simultaneously . In fact, if you file for Social Security at 65, you'll automatically reduce your retirements benefits by filing before your full retirement age.
Going back to our example, filing at 65 would leave you with a monthly benefit of $1,300, as opposed to $1,500 at full retirement age. On the one hand, that's not a terrible cut (at least not compared to the $1,050 you'd get at age 62). On the other hand, you're still setting yourself up to collect $200 less per month.
Claiming Social Security at age 66
If you were born between 1943 and 1954, age 66 is when you reach full retirement age for Social Security purposes. As such, claiming benefits at this age will give you the exact monthly payout your earnings record entitles you to.
If you were born after 1954 but before 1960, you'll be eligible for your full monthly benefits once you reach 66 and a certain number of months. Use the table above to get your timing right, because if your full retirement age is 66 and four months but you file at 66 on the nose, you'll cut your benefits (though not by a lot).
Now if you were born in 1960 or later and therefore have a full retirement age of 67, filing at 66 will result in a benefits reduction. But again, it won't be a very sizable one. Going back to our example, claiming benefits at 66 when your full retirement age is 67 will turn a $1,500 monthly benefit into $1,400.
Claiming Social Security at age 67
If you were born in 1960 or later, age 67 is your full retirement age, which means that if you pull the trigger on Social Security at that point, you'll collect the full monthly benefit you're eligible for based on your work record. Some experts will tell you that filing at full retirement age is a good idea: You're not shrinking your benefits, but you're also not waiting too long to collect them. In our example, claiming Social Security at 67 will give you that precise $1,500 based on your earnings record. Keep in mind that if you were born before 1960, filing at age 67 will result in an automatic benefits boost.
Claiming Social Security at age 68 or 69
Age 68 is hardly a common choice when it comes to filing for benefits. Still, it's a smart move to consider if you don't need your benefits immediately upon reaching full retirement age, but you also don't want to go to the extreme of waiting to file for benefits until 70.
Depending on your full retirement age, taking benefits at 68 will result in an 8% to 16% boost in benefits. If your full retirement age is 66, you'll get that full 16% boost, and if your full retirement age is 67, you'll grow your benefits by 8%. In our example, that $1,500 a month you would've been eligible for at 67 becomes $1,620 at 68.
Like 68, age 69 isn't a particularly popular filing age on the Social Security front. But if you're able to hold out until then, you'll boost your benefits by anywhere from 16% (if your full retirement age is 67) to 24% (if your full retirement age is 66). In our example, you'd grow a $1,500 monthly benefit into $1,740, which could come in handy later in life.
Claiming Social Security at age 70
Age 70 is the longest you should wait to file for Social Security, because that's when delayed-retirement credits cease to accrue. So while you won't be forced to take benefits once you turn 70, there's no financial incentive to hold off on filing beyond that point.
Of course, the upside of filing at 70 is that you'll snag the maximum benefit boost you're eligible for. If your full retirement age is 66, you'll increase your benefits by 32%. If your full retirement age is 67, your benefits will grow by 24%, which means the $1,500 we've been working with in our example will increase to $1,860.
Not everyone can afford to wait until 70 to take benefits, though. If you need the money sooner, holding out until 70 might cause you a great deal of financial hardship. Even if you don't need the money, waiting until 70 might force you to delay some of the plans you might've had for yourself in retirement, so that's certainly a drawback to consider.
Claiming Social Security past age 70
As stated above, there's no rule stating you have to file for Social Security once you turn 70. But waiting past that point is a big mistake. That's because your benefits won't grow by a penny if you delay past age 70, and even if you don't need the money to pay bills or spend on leisure, you can always invest it or stick it in the bank to earn some interest.
Now if you happen to forget to file for benefits at 70, you won't necessarily lose out on any money, provided you realize the error of your ways shortly thereafter. Social Security will pay up to six months of retroactive benefits so that if you file at 70 and four months, you'll recover those four months' worth of payments. But if you wait until your 71st birthday to file, you'll end up forgoing six months' worth of benefits.
Factors to consider when choosing a Social Security filing age
As you can see, there are benefits and drawbacks to filing for Social Security at each of the aforementioned ages. In a nutshell, it boils down to getting money sooner or getting a higher monthly payout, while the drawbacks entail waiting longer to receive benefits or collecting less money each month. Therefore, to determine when you ought to file, ask yourself the following questions.
How's my health?
Your health should play a huge role in determining when you first file for benefits, and here's why: Social Security is technically designed to pay you the same lifetime total regardless of when you initially file. The logic is that any reduction in monthly payments you face by filing early will be offset by the greater number of individual payments you collect. On the flip side, filing later will result in fewer payments but a higher benefit each month. In other words, things are designed to basically even out.
That formula, however, is based on a pivotal assumption: that you'll live an average lifespan . But if your health is poor and you therefore have reason to believe that you'll pass away sooner than the typical senior, it generally pays to take benefits as early as you can. And on the other end of the spectrum, if your health is great and you expect to live a long life, it usually pays to hold off on benefits as long as possible to secure the largest possible lifetime payout.
Let's go back to our example and assume you're eligible for a $1,500 monthly benefit at age 67. Filing at age 62 will reduce your payments by $450 a month, but you'll collect 60 more payments as a result. If you pass away at a little over age 78-1/2, you'll end up with roughly $210,00 regardless of whether you file at 62 or 67. But if you pass away at the relatively young age of 73, you'll collect $30,600 more by filing at 62 rather than waiting five more years.
By the same token, if you're torn between filing at 67 versus waiting until 70, in our example of a $1,500 full monthly benefit, you'll come out with a lifetime total of $279,000 in either scenario if you live until 82 1/2. But if you wind up living until age 90, you'll come out $32,400 ahead by filing for benefits at 70.
The following table helps illustrate this point:
TABLE BY AUTHOR.
Of course, without a crystal ball, it's impossible to predict how long you'll live -- but your health is certainly a strong indicator. Therefore, while it's never pleasant to contemplate your own mortality, for better or worse, it's important to be realistic in your outlook and use that knowledge to help drive your filing decision.
What's my employment status?
Your employment status should also play a role in determining when you file for benefits. First of all, if you're still working and collecting a paycheck, you may not need to claim benefits right away, in which case waiting is a good way to increase those monthly payments. On the other hand, if you're unable to work or have been laid off from your job , you might need the money right away and therefore have no choice but to file.
Whether or not you're working may also affect the amount you're allowed to collect in Social Security. People who are both working and receiving a retirement benefit before they've reached full retirement age are subject to the earnings test , which can cause a portion of their benefits to be withheld.
In 2018, you're allowed to earn up to $17,040 a year and collect your benefits in full (by "in full," we mean you're allowed to collect whatever amount you're entitled to based on your earnings history and the age at which you file). However, your benefits will be reduced by $1 for every $2 you earn above $17,040. For 2019 , this threshold is increasing to $17,640, which means you can earn that much without a reduction in benefits.
If you're reaching full retirement age by the end of 2018, you're allowed to earn up to $45,360 without having your benefits reduced. If you earn more than that, Social Security will reduce your benefits by $1 for every $3 above that limit. In 2019, this limit increases to $46,920.
Keep in mind that these rules only come into play when you're working and collecting benefits before reaching full retirement age. If you're already at full retirement age, you can earn as much as you'd like, and it won't affect your benefits at all.
Furthermore, the above reductions ($1 for every $2 or $3 in earnings, depending on the circumstances) won't cause you to lose out on those benefits permanently. In fact, Social Security isn't reducing your benefits so much as withholding part of them. If you lose, say, $1,000 in benefits because your earnings exceeded the aforementioned thresholds, then once you reach full retirement age, you'll get a higher monthly payout to make up for the withheld amount.
How badly do I need the money?
The state of your finances will also play a big role in helping you determine when to file for Social Security. If you stop working at full retirement age but have a healthy nest egg at that point, then you may not need your benefits right away, in which case letting them grow a while longer may make sense. On the other hand, if you're forced to retire sooner than expected and don't have much in the way of savings , you may have no choice but to start collecting benefits as soon as possible to pay your bills. And make no mistake about it: You're better off getting your hands on the money you need, even if that means a reduction in benefits, than racking up costly debt later in life to keep up with your expenses.
If you arrive at full retirement age without much money saved up, but you have the option to keep working and hold off on claiming Social Security, then it pays to do so. The reason? Those benefits will most likely end up constituting a large chunk of your monthly retirement income, and if you're low on savings, you'll need larger benefits to compensate.
What will I use the money for?
There are different schools of thought when it comes to claiming benefits early versus waiting. If you need the money immediately, then it's generally a good idea to file ahead of full retirement age in order to avoid debt and other financial woes when you're older. But if you don't need the money, waiting can clearly pay off.
On the other hand, you don't have to need that money to justify collecting it early. If you have enough savings to cover your basic expenses but simply want the money from your benefits to enjoy more leisure activities as a senior, then that's your right. After all, you'll have more energy to travel and pursue hobbies when you're in your early 60s then you will at age 70.
Furthermore, collecting benefits sooner rather than later might actually help you boost your retirement income despite the potential reduction (or lack of growth) in benefits. If filing early provides you with enough cash to start your own business , for example, then you'll have a means of earning money for many years to come, which might more than compensate for whatever hit on benefits you take. Of course, as mentioned above, the annual "return" you get for delaying Social Security is guaranteed, whereas a business (or virtually any other investment) could ultimately lose money.
A complex but important decision
Deciding when to file for Social Security is easier said than done, so your best bet is to understand the consequences of claiming benefits at different ages while taking your personal circumstances into account. No matter what age you ultimately land on, the key is to make an informed decision rather than file impulsively. Follow that rule, and with any luck, you'll end up making the right choice for your retirement.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.