Social Security is a key income source for seniors, and if you want to make the most of it in retirement, you'll need to be strategic about when you file. You're entitled to your full monthly benefit -- meaning the amount you're eligible for based on your earnings record -- once you reach full retirement age. That age is either 66, 67, or somewhere in between, depending on when you were born. But you don't have to file for benefits at full retirement age. You're actually allowed to claim them as early as age 62, and you can wait all the way until age 70 as well.
The latter move is hardly a popular choice, with only 3% of recipients filing for Social Security at 70. But it's a decision that can really pay off. For each year you delay your benefits past full retirement age, you'll boost them by 8%. This means that if you're entitled to $1,600 a month at a full retirement age of 67 based on your earnings record, you'll increase each payment you collect to $1,984 -- for life. Therefore, if you're thinking of claiming benefits before reaching age 70, here are three good reasons to hold off.
1. You're low on savings
Social Security isn't designed to sustain retirees in the absence of other income. Generally, those benefits will replace about 40% of your pre-retirement income if you were an average earner. Most seniors, however, need 70% to 80% of their former earnings to live comfortably. If you're low on savings, to the point where the most you can do is catch up a little but not fully, then your next best bet is to grow your Social Security benefits as much as you can by filing as late as possible.
2. You're still working
Once you reach full retirement age, you're allowed to work and collect Social Security at the same time without having to worry about a reduction in benefits. (You can technically do the same before full retirement age, but if you earn too much, you'll have a portion of your benefits withheld.) But if you're still collecting your usual paycheck, you should, in theory, be able to pay your bills based on that money alone. Therefore, you might as well hold off on Social Security and grow your benefits.
3. Your health is fantastic
The interesting thing about Social Security is that it's designed to pay you the same lifetime total regardless of when you initially file. The logic is that filing after full retirement age will boost your benefits, but you'll collect fewer individual payments. This formula, however, assumes that you'll live an average life expectancy. If your health is great, though, and you expect to outlive the average senior, then you'll generally come out ahead financially by waiting as long as possible to start getting benefits.
Here's how that might play out. If you're entitled to $1,600 a month at your full retirement age of 67, waiting until 70 will increase each payment you get to $1,984. Now you'll miss out on three years of payments, but that's OK, because once you reach age 82 1/2, you'll break even -- meaning, you'll have collected the same lifetime total regardless of whether you filed at 67 versus 70.
But watch what happens if you live until age 90. In that case, you'll come out over $34,000 ahead by filing at 70 rather than 67. And if you live until 95 (which 10% of today's 65-year-olds are expected to do), you'll come out over $57,000 ahead in your lifetime by waiting until 70 to file.
They say that good things come to those who wait, and that certainly holds true for Social Security. Before you rush to claim benefits, consider what you have to gain by delaying them as long as possible -- and imagine what you might do with a larger income stream for life.