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Your monthly Social Security benefit is calculated by taking your average monthly wage over your 35 highest-paid years in the workforce, adjusting that number for inflation, and applying it to a special formula. You’re then entitled to your full monthly benefit, based on your personal wage history, once you reach full retirement age, or FRA.
FRA kicks in at 66, 67, or somewhere in between, depending on your year of birth, but you don’t have to sign up for Social Security at that exact age. Rather, you’re allowed to claim your benefits as early as age 62, albeit at a reduced rate, or you can delay your benefits past FRA and score a boost for holding off, up until age 70.
In fact, your benefits will increase permanently by 8% for each year you delay your filing beyond FRA, so if you’re entitled to your full monthly benefit at 67 but wait until 70 to file, you’ll grow that benefit by 24%. Postponing your filing is certainly a good way to get more money out of Social Security each month. And it’s an extremely useful strategy if you’re entering retirement with little in the way of savings. But while delaying Social Security is often a wise move, in this one situation, it actually doesn’t make sense.
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Look at the big picture
Though delaying Social Security might score you a higher monthly benefit, filing earlier may result in a higher lifetime benefit if you don’t have very high hopes that you’ll live a long life. Of course, predicting your own life expectancy isn’t easy, but if you have known health issues or a family history of passing away at a young age, then claiming benefits early may work to your advantage.
Say you’re entitled to $1,500 a month at an FRA of 67. Filing at 62 will give you $1,050 a month instead, whereas filing at 70 will boost your monthly benefit to $1,860. But if you unfortunately don’t think you’ll be around all that long to collect that higher monthly benefit, then it won’t actually do you much good.
In fact, let’s imagine you pass away at age 75. If you were to file for Social Security at 62, you’d wind up with a total lifetime benefit of $163,800 based on 13 years of collecting $1,050 a month. But if you were to file at age 70 and pass away at 75, you’d only collect a lifetime total of $111,600 based on five years of receiving $1,860 a month.
And that’s why delaying your filing makes little sense if you’re not confident you’ll live a long life. Though the idea of boosting your monthly paycheck may sound nice, you’ll also need to think about your lifetime paycheck.
Of course, the one exception to this rule is if you have a spouse you expect to outlive you for many years who’s apt to be reliant on survivor benefits. Your spouse’s monthly survivor benefit will equal 100% of your monthly benefit, so if you delay your filing, it may not put more money in your pocket during your own lifetime, but it could help your spouse stay afloat financially for many years once you’re gone. But if you’re single and don’t expect to live a long life, or you have a spouse who’s younger but is also entitled to a generous benefit based on his or her own work history, then delaying Social Security isn’t a great idea, despite the lure of a higher monthly paycheck for a limited period of time.
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