Journey Into Retirement

How to Maximize Social Security Benefits: The Hidden Advantages of Delayed Filing

Social Security is supposed to be simple. You work a number of years and contribute to the system. Then the government provides you with a monthly check to help support your retirement. However, so many options have been built into the benefits that it is difficult to determine how to maximize what you get. There are options related to when you file. There are options about how much your spouse can collect and the list goes on and on. It has gotten so complex that there are companies that, for a fee, will help you maximize your Social Security benefits.

Recently, as I began to assess my own situation, I examined the all-important issue of when to file for benefits. You can file for Social Security as early as age 62 with a reduced benefit. You get full benefits at your full retirement age, usually 66 or 67. And, you can get some additional increments if you delay up until the age of 70. The idea is that you get more on a monthly basis if you delay benefits because you presumably have a shorter time to collect. However, is there more to this than meets the eye? I decided to take a look.

Greater Benefit If You Wait Until Age 70 to File

If you begin collecting Social Security at age 62, your will receive 75% of the monthly benefit that you would get if you waited until your full retirement age. After you reach your full retirement age, you get an additional 8% for each year you delay up until age 70. So, my full retirement age is 66 and If I waited to file until age 70, I assumed that I would receive 32% more than I would If I had filed at my full age (4 year delay x 8% each year = 32%). However, as I examined the calculation that the Social Security Administration uses, I learned that the actual increment to the benefit would not be 32%. Rather it would be 36% because the added benefit is compounded each year. You do not add the 8% increments together. You multiply them (1.08 x 1.08 x 1.08 x 1.08 = 136% of the full age benefit). This was a very interesting and unexpected discovery, so I kept going.

Base Benefits Grow If You Wait To File

Say that your payout at full retirement age is $1254/month, the average benefit in 2012. If you retired at age 62 in 2012 you would receive 75% of that or about $941/month. What happens if you wait until age 66 (the year 2016) to collect. Well, Social Security benefits are adjusted for inflation each year. At age 66 you would not start with a $1254/month benefit because that applied to 2012 and during the four years that you waited, the base benefit was increased for inflation.

Let’s say that the inflation rate was 3.4% (the long-term average) during each of those years. When you start collecting at age 66, that benefit would have grown to $1433/month. If you waited until age 70 to collect, the monthly base benefit would be $1639. However, at age 70, you would increase that $1639 by an additional 36% to $2229/month because you got the compounded 8% for each year you waited. The inflation adjustment each year would not be a gain in real terms because it simply would help you offset a higher cost-of-living. However, as you do the math, be sure to factor this in.

Sum It Up

Say that we have a mythical retiree who has a presence in three alternative universes. In each they make a different retirement decision. In one reality, our retiree files for Social Security at age 62. In another, they file at age 66, their full age. In the third, they file at age 70. Independent of when you file, expectations about lifespan will not change much. The average male in their 60s would have an expected lifespan of about 84 years. As they turn age 85, the person who filed at age 62 would have collected benefits for 23 years. File at age 66 and you collect for 19 years and at age 70 you collect for 15 years. Did everyone collect the same amount?

Assuming an average 3.4% inflation adjustment, if you began collecting at age 62, as you turn age 85 you would have received a total of $384,258 in benefits. If you waited until age 66, at age 85 you would have received a total of $449,011. Finally, if you began collecting benefits at age 70, by age 85 you would have received a total of $512,199. This is an additional 17% in benefits if you waited until age 66 and over 33% more if you waited until age 70.

What drives these differences is a greater benefit at retirement coupled with a greater dollar inflation adjustment on that higher benefit. A person who waits until age 66 to file would catch up with the person who filed at age 62 in their tenth year. A person who waited until age 70 would catch up when they had collected around eight years. The inflation rate affects these differences. Higher inflation will increase these differences and a lower rate will shrink them.

It really surprised me when I ran these numbers. The discussions I have read on-line indicate that the monthly benefits increase as you delay. However, the logic sounded like it all added up to about the same total benefit in the end. If you are considering when to file for Social Security these results should provide some guidance. There is a real benefit to delaying because you will be much better off in the end, as will your heirs!