The Social Security Administration (SSA) frequently receives questions about the best age to retire and claim benefits. Their standard response is, “There is no single ‘best age’ for everyone, and ultimately, it is your decision.”
While this response is technically correct, certain patterns and guidelines indicate the best time to claim benefits if maximising your financial return is a priority. For many Americans, statistical evidence suggests that one specific age is the best time to start collecting.
Social Security’s Balancing Act
You can begin collecting Social Security retirement benefits as early as age 62, but why don’t more people claim them right away? The answer is that early retirement carries a penalty. The SSA reduces your benefit for each month you begin receiving payments before reaching full retirement age (FRA).
For up to 36 months before your FRA, your benefit is reduced by five-ninths of one percent per month. Beyond the first 36 months, it is reduced by five-twelfths of one percent per month. For those born in 1960 or later, the full retirement age is 67.
This means that if someone claims Social Security at age 62, their benefit will be reduced by 30% compared to what they would receive at age 67. The financial difference can be significant.
Delaying your Social Security benefits, on the other hand, may result in a larger payment. If you wait until you reach age 70, you will be eligible for a delayed retirement credit.
For individuals born after 1943, this results in a two-thirds of 1% increase for each month you delay beyond your FRA, for a total of 8% per year. By waiting until 70, your benefits will be 24% higher than if you started collecting at 67.
The decision on when to begin receiving benefits requires weighing this trade-off. You could choose to make earlier payments, accepting a smaller monthly cheque, or to wait for a larger monthly benefit, but you will have to rely on other sources of income until then.
Insights From Research
Several studies have been conducted over the years to determine the optimal age to begin collecting Social Security benefits. One of the most comprehensive studies was conducted by economists David Altig of the Federal Reserve Bank of Atlanta, Laurence Kotlikoff, and Victor Yifan Ye of Boston University.
Their findings were published in November 2022 as a working paper for the National Bureau of Economic Research (NBER), and The Motley Fool analysed them.
Economic Security Planning, Inc. developed the Fiscal Analyser, which was used in their study. This tool considered a variety of factors, including life expectancy uncertainty, cash-flow constraints, and the impact of major federal and state programs, such as Medicare and Medicaid.
The study’s findings were clear: for the vast majority of Americans, delaying Social Security benefits beyond the age of 65 is financially beneficial. In fact, the researchers discovered that more than 99% of people should wait until they are at least 65 before claiming benefits, and more than 90% would get the most out of their benefits by waiting until they are 70.
Despite this, data show that most Americans do not wait until they are 70 to begin collecting. According to the study, only 10.2% of people wait until they reach the age of 70 to claim their benefits. This means that most people are squandering potential retirement income by filing claims earlier than necessary.
Reasons to Consider to Retire and Claim Early
If waiting until 70 provides the best financial return, why do so many people choose to claim benefits earlier? There are two compelling reasons to claim Social Security before reaching that age.
First and foremost, individual health circumstances are important. You are more than just a statistic; your personal health, family history, and lifestyle may all influence your decision. If you have reason to believe that you will not live into your late 70s or beyond due to health issues, claiming benefits earlier may be a better option for you.
Second, while financial considerations are important, they do not cover everything. Some people value the opportunity to enjoy retirement in its early years, when they may be more active.
Starting to collect Social Security earlier may provide them with the financial flexibility to travel, pursue hobbies, or engage in other activities that they may not be able to enjoy as much later in life. For some, the trade-off of a lower monthly benefit is worth it for the freedom to live their retirement on their own terms.