Many professionals agree that a financially comfortable retirement will require retirees to have an income somewhere between 70 and 80 percent of their pre-retirement income. For most individuals this will require multiple sources of income during retirement years such as: savings, investments, pensions, and Social Security. Although the average retiree’s Social Security will only replace about 40 percent of their pre-retirement income, the person’s age when they retire can make a huge difference in the size of their monthly benefit check.
For instance, a retiree’s monthly Social Security check could be up to a third less than their full benefit if they retire at the age of 62. Consequently, it is important for people considering retirement to understand the advantages and disadvantages of retiring at various ages before they visit their local Social Security office. Retirees often ask us, “What is the best age to start applying for Social Security?” Unfortunately there is not a universal answer, and the answer is unique to each potential retiree based upon their specific situation. Conditions such as an individual’s date of birth, health, family history, finances, and even marital status play a big part in determining the best time to apply for social security. So what are the retirement ages? Basically, the Social Security Administration has created three retirement age categories: minimum retirement age, full retirement age, and maximum retirement benefit age.
1. According to the Social Security Administration, minimum retirement age is age 62. Nearly 60 percent of the Social Security recipients apply for their Social Security benefits at age 62. Unfortunately this early retirement is offset by a reduced benefit check for the rest of their lives. The actual amount the benefits are reduced depends upon several factors, but a good rule of thumb is that the benefits will be reduced by about one third.
2. Full retirement age is based upon an individual’s date of birth. At one time, full retirement age was 65 for every retiree, but over the years Congress has changed the laws, and full retirement age now varies between age 65 and 67 depending on the year the person was born. A retiree who waits until full retirement age to begin drawing their Social Security benefits will receive a monthly check that will be about 25 percent higher than if they had retired at age 62.
3. Maximum retirement benefit age is age 70. If a person does not apply for their Social Security benefits at their full retirement age, but instead delays their retirement, they can increase their potential Social Security benefits by 8 percent for every year they delay retirement until age 70. That is about 30 percent higher than if they retired at their full retirement age, and it can be about 55 percent higher than if they retired at age 62.
In theory, Social Security benefits are age neutral. According to the Social Security Administration, the average retiree who starts receiving reduced benefits at age 62 will receive approximately the same amount of money over their lifetime as if they had waited until full retirement age to receive full benefits, or even increased benefits at the maximum retirement age. In other words, a person who retires at age 62 will receive a smaller monthly check, but they will receive that smaller check for several years more than if they had delayed retirement until full or maximum retirement age. The Social Security Administration bases their calculations upon the average lifespan of people in the United States.
Age 78 to 82 is often identified as the break-even point where the Social Security benefits will balance out. This is very useful information when deciding on the best age to retire. For instance, if a person is a female, and the women in her family typically live well into their upper 80’s or 90’s, then waiting until full or maximum retirement age could mean receiving many tens of thousands of dollars more during her lifetime. On the other hand, if a person is a male, and the men in his family rarely live past age 70, then applying for Social Security benefits at age 62 may make more sense.
Although life expectancy is only one of many things a person needs to research and understand when deciding on the best age to retire, it is a good start. The important point to remember is that each person is unique. So whether a person decides to retire at age 62, 70, or some age in between, the decision should only be made after careful research and planning with the help of a financial advisor. A hasty decision could mean losing out on money that could make the difference between a comfortable retirement and one that is less than desirable. Please let us know if you or someone you know would like assistance determining the right age to retire.