When you retire, your Social Security benefits will be calculated based on the wages you earned during your 35 highest-paid years. But the amount you actually collect each month will also depend heavily on when you claim those benefits.
If you file for Social Security at your full retirement age (FRA) -- which will be either 66, 67, or somewhere in between, depending on your year of birth -- you'll be able to collect the exact monthly benefit your earnings history officially entitles you to. File earlier than that -- eligibility starts at age 62 -- and you'll be reducing the size of your monthly payments by as much as 30% for life. But if you hold off on filing until you're past your FRA, you'll accrue delayed retirement credits that boost your benefits by 8% a year, up until age 70.
Of course, the downside to delaying benefits is that you'll have to wait longer to collect your money, and you'll get fewer monthly checks. But there are a few compelling reasons to hold off.
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1. You'll come out ahead financially if you live a long life
Waiting to claim Social Security will certainly give you a higher monthly benefit, But if you live a long life, it could also result in a higher lifetime payout. The interesting thing about this government pension program is that it's designed to pay with the goal of giving people the same lifetime total benefit, regardless of when they file. Those who delay will get higher monthly benefits, but fewer individual payments -- and in the end, it should all come close to breaking even.
But there's a big "if" built into that math: The government starts from the assumption that you'll have an average lifespan. If you wind up living a significantly longer than average life, waiting to file could work out far better for you financially.
For example: If you would be entitled to a monthly benefit of $1,500 at a full retirement age of 67, but you delay your filing until age 70, and then live to age 90, you'll come out $32,400 ahead. And if you live until age 95, you'll come out $54,000 ahead.
2. You can compensate for a lack of retirement savings
An estimated 64% of Americans have less than $10,000 socked away in a retirement savings plan. If you're one of them, but are younger and have several more decades to invest and prepare, that's not so bad. But if you're already in your late 50s or 60s with such a skimpy total in your IRA or 401(k), then you're on course for a lifestyle downgrade in retirement.
That said, if you delay claiming your Social Security benefits as long as possible, your financial situation in retirement won't be nearly as dire. If you're entitled to a monthly benefit of $1,500 at age 67 but you file at 70 instead, you'll boost your annual income by $4,320. That won't replace a completely missing nest egg, but it will help.
3. You'll leave a higher monthly benefit behind for a surviving spouse
If you're married and pass away before your spouse, he or she will be entitled to survivors benefits from Social Security. The monthly benefit your spouse collects in this case will be the same payment you were entitled to (provided they wait until full retirement age to file). As such, if you boost your benefits by waiting to claim them, you'll leave your widow/widower with a more robust income stream for life. That's particularly important if your spouse is a lot younger than you, and you expect them to outlive you by several decades.
Postponing the day you claim Social Security requires patience. But the upsides -- boosting your monthly (and possibly your lifetime) income, compensating for a lack of retirement savings, and leaving your spouse with more financial security -- mean it could be a very wise move.
