When it comes to Social Security, perhaps no decision carries more weight than the age at which you choose to start receiving retirement benefits. This crucial choice has far-reaching implications for your financial well-being throughout your golden years.
Some individuals opt to maximize their benefits by holding off until age 70 to claim Social Security, while others decide to start as early as possible, receiving their retirement benefits at age 62. However, there is a substantial price to pay for those who choose the latter. Here’s an in-depth analysis of the remarkable difference in the average Social Security benefit at age 70 compared to 62.
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The Intricacies of Social Security Retirement Benefit Calculation
Understanding how your Social Security retirement benefits are determined is essential in making an informed decision. The primary factor considered by the Social Security Administration (SSA) is your earnings history, specifically the 35 years in which you earned the most income.
After compiling this earnings history, the SSA utilizes the national average wage-indexing series to adjust the earnings, reflecting the rise in the standard of living during your career. The outcome of this indexing process is your average indexed monthly earnings (AIME).
Subsequently, the SSA employs a rather complex formula to calculate your primary insurance amount (PIA) based on your AIME. If you retire at your full retirement age (FRA), your monthly benefit will align with your PIA. However, if you retire before or after your FRA, your monthly benefit will be adjusted accordingly.
If you choose to start collecting retirement benefits before your FRA, your monthly benefit (using your PIA as a base) will be reduced by five-ninths of 1% for each month preceding your FRA, up to 36 months. Should you opt to claim Social Security at age 62 and your FRA is 67, your monthly benefit will be slashed by a significant 30%.
Conversely, delaying the collection of Social Security retirement benefits till after your FRA results in the accrual of delayed retirement credits. For individuals born in 1943 or later, this credit amounts to 8% per year until the age of 70. This means that for those with a FRA of 67, delaying the claim till age 70 will elevate the monthly benefit by a substantial 24%.
Comparing Averages for Different Starting Ages
At age 62, the average monthly Social Security benefit for retired workers stands at $1,274.87 according to the SSA’s Annual Statistical Supplement for 2023. However, for retired workers at age 70, the average monthly benefit jumps to $1,963.48.
This significant disparity between the two figures stems from the impact of the early-retirement penalty and the delayed-retirement credits. Nevertheless, it is crucial to note two key aspects about these averages.
Firstly, these averages are based on data available in December 2022 and do not account for subsequent cost-of-living adjustments (COLAs) or potential rises in average earnings. Consequently, today’s average monthly benefits for ages 62 and 70 are likely to be higher than those indicated by the SSA’s latest figures.
Secondly, the average monthly benefit for age 70 encompasses not only individuals who waited until age 70 to collect their retirement benefits. For instance, anyone who commenced receiving retirement benefits at age 67, three years before the SSA calculated the averages, would have been included in the age 70 figure. Thus, the actual average for individuals who held off until age 70 to claim Social Security is expected to surpass SSA’s calculated average.
Considerations Beyond Averages
The variation in individual earnings history means that one’s monthly Social Security benefits could differ significantly from the averages cited. Moreover, the averages do not encapsulate other personalized factors that could impact the benefits.
Notably, the averages do not consider additional sources of income individuals may have, such as pensions, significant sums in IRA and 401(k) plans, or continued employment after commencing the receipt of Social Security retirement benefits. Hence, the decision of when to claim Social Security retirement benefits necessitates a comprehensive consideration of various factors, with the amount of the benefit being just one facet.
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