One of the most important retirement decisions you'll have to make is when to claim Social Security. You can sign up as early as 62, but that doesn't always give you the most money overall. The right claiming age varies by person, depending on their financial situation and life expectancy.
But one age stands out as the best for most people. A recent National Bureau of Economic Research (NBER) paper found that 90% of Americans should claim at this age to maximize their benefits, but only 10% actually do. Here's why.
Image source: Getty Images.
How the government calculates your Social Security benefit
To understand why some Social Security claiming ages are more advantageous than others, you need to understand the three key factors that influence your benefits. They are:
- The number of years you've worked
- How much you earned during your working years
- Your age when you sign up
You must work for at least 35 years if you hope to avoid zero-income years weighing down your benefit calculation. But there's nothing wrong with working longer. Many people earn more money later in their careers. Working additional years slowly pushes their earlier, lower-earning years out of their benefit calculation, boosting their Social Security checks.
The government looks at your average monthly income during your 35 highest-earning years to calculate your primary insurance amount (PIA). Paying more money in Social Security taxes over the years increases your PIA and your benefit checks. But since the government looks at average income, a single incredible year won't affect you as much as reporting consistently high earnings.
Your PIA is the benefit you're eligible for at your full retirement age (FRA). This is 66 to 67, depending on your birth year. You can apply as early as 62, but signing up then reduces your benefit by up to 30%. Every month you delay slowly increases your Social Security checks until you reach 70. That's when you qualify for your maximum benefit of 124% to 132% of your PIA per month.
The best age to claim Social Security
The NBER paper found that virtually all workers between the ages of 45 and 62 should delay Social Security past 65 if they hope to squeeze as much as possible from the program. What's more, more than 90% should wait until 70 to sign up. Doing so could give the typical retired worker an extra $182,370 in discretionary income throughout their retirement. But only 10.2% of workers actually end up with their maximum Social Security check.
There could be a few reasons for this. First, waiting until 70 isn't the right move for everyone. If you have a terminal illness, for example, delaying Social Security until 70 could cause you to miss out on benefits altogether. Even those who live until their mid-to-late 70s may get more money overall by signing up earlier.
Second, some people simply cannot afford to delay benefits that long. Some may have lost their jobs or fallen ill and they don't have a large nest egg to rely on. Social Security is often the only way they can make ends meet. In this case, claiming Social Security early is a better option than taking on debt, but it might not be your only choice.
Those who are able to work could stay in the workforce long enough so they don't need Social Security to cover their bills right away. Retirees could seek out other government programs to help them with their everyday costs, like Medicare and Medicaid for healthcare and Supplemental Nutrition Assistance Program (SNAP) benefits for groceries.
But for some, waiting until 70 to claim Social Security isn't going to be feasible no matter what they do. It might be possible to compromise by delaying Social Security for a few months or years rather than waiting until 70. This could permanently increase your benefits without putting too much of a strain on your finances today.
It's ultimately your call. Delaying until 70 is certainly worth considering, but don't feel bad if you need to sign up for Social Security right away at 62 -- or if you just want to. Either way, you'll still get money from the program and it could add up to hundreds of thousands of dollars over your lifetime.
