Millions of seniors today depend on Social Security to pay their expenses in retirement, which is why it's so important to file for benefits at the right time. Though those benefits themselves are calculated based on your 35 highest-paid years of earnings, the age at which you file for Social Security can cause your monthly payments to go up or down (or stay the same).
If you file for Social Security at full retirement age, you'll get the precise monthly benefit your earnings history renders you eligible for. But if you file before that point, you'll reduce your benefits in the process. Here's what full retirement age looks like, depending on your year of birth:
Year of Birth
Full Retirement Age
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.
As you can see, the earliest age to collect benefits in full is 66. Yet future retirees (those who plan to retire within the next 10 years), on average, believe they're eligible for full benefits at age 63, according to Nationwide.
IMAGE SOURCE: GETTY IMAGES.
To be clear, you are allowed to file for Social Security at 63. In fact, you can do so as early as age 62, and not surprisingly, that's the most popular age to claim benefits. But know this: For each month you file for benefits ahead of full retirement age, you'll face a reduction in those payments, and the earlier in life you file, the more monthly income you stand to lose.
If you were to file for Social Security at age 63 with a full retirement age of 66, you'd lose about 20% of your monthly benefit amount. If you were to file at 63 with a full retirement age of 67, you'd be looking at a 25% reduction. And that's why it's problematic that Americans think they're entitled to their full benefits at 63. Filing at that point in life could slash an otherwise essential retirement income stream for those who need it.
How much will you depend on Social Security?
Let's be clear: Social Security isn't meant to sustain seniors by itself. Right now, those benefits are designed to replace about 40% of the average earner's preretirement income, while most seniors need roughly double that amount to live comfortably. Furthermore, the latest Social Security Trustees Report stated that once the program's trust funds run out, which could happen as soon as 2035, recipients could see up to a 20% reduction in scheduled payments. Therefore, depending on Social Security in the absence of independent savings is a very bad idea.
The fact of the matter, however, is that many seniors do rely on Social Security alone to pay their bills. If you're behind on savings, and that's therefore your plan, you probably can't afford to reduce your benefits in any way. In that case, you should commit your full retirement age to memory, and aim to file for benefits then -- not before. If you claim benefits before full retirement age, the lower monthly payment you lock in will remain in effect for the rest of your life unless you manage to undo your benefits application and repay every cent you collected to the Social Security Administration within a year. And chances are that's not a hit you can afford.
Of course, there's another option as well -- delaying benefits past full retirement age and boosting them by 8% a year in the process. This option is on the table until age 70, at which point delayed retirement credits cease to accrue. But if you're willing to wait until 70 to claim benefits, you'll increase them by 24% to 32%, depending on your full retirement age. Better yet, that boost will remain in effect for the rest of your life.
More From The Motley Fool
- 10 Best Stocks to Buy Today
- The $16,728 Social Security Bonus You Cannot Afford to Miss
- 20 of the Top Stocks to Buy (Including the Two Every Investor Should Own)
- What Is an ETF?
- 5 Recession-Proof Stocks
- How to Beat the Market
The Motley Fool has a disclosure policy.