Social Security is an important source of income for many older Americans, so making smart choices with regard to claiming benefits could be the key to financial security.
For those who are concerned about having enough money to live on after they've stopped working, getting more money from Social Security could make a huge difference in their quality of life. And the good news is, the decisions you make could have a big impact on how much annual income you receive.
The typical retiree, in fact, could end up with over $10,000 per year in extra Social Security benefits if they make the right choices in their later years.
Here's how the typical retiree could get $10,740 in extra Social Security benefits each year
So how could the average senior get more than $10,000 in extra Social Security income each year? It's simple. You would need to wait until the age of 70 to get your first check.
You have a choice to claim benefits starting at 62 and you also have a full retirement age (FRA) between 66 and four months, and 67. If you get your first payment at your FRA, you'd receive your standard benefit, which equals a percentage of the average amount you earned during the 35 years your (inflation-adjusted) wages were highest. You also have the option to wait until 70 to start your checks.
If you begin benefits at 62 or any time before FRA, your standard benefit shrinks since early filing penalties apply. If you begin benefits any time after FRA, your standard benefit increases as it's possible to earn delayed retirement credits up until the age of 70.
Early filing penalties reduce benefits by five-ninths of 1% per month if you start payments within 36 months of FRA. That's a 6.7% annual reduction. If you begin getting checks even earlier, an additional monthly penalty five-twelfths of 1% will further slash your monthly payment. That adds up to a 5% annual benefits cut. And delayed retirement credits increase payments by two-thirds of 1% per month, which results in an 8% annual increase to your standard benefit.
If you were on track for the average Social Security benefit -- which is $1,657 in 2022 -- you would see that cut by a total of 30% if you had a full retirement age of 67 and claimed your benefits five years early at 62. That would give you a monthly income of $1,160 at 62. But if you instead waited until 70 and got a 24% benefits increase, your income would climb all the way to $2,055.
Some quick math shows that's $895 extra per month -- or $10,740 per year -- more money. So by waiting an extra eight years, your income goes up quite dramatically. Of course, it's up to you to decide if you'd rather get less money each year but get it sooner or if you'd prefer to maximize retirement income. For many seniors, however, waiting is the right choice due to the substantial extra money that a delayed claim offers.