Chances are that Social Security will be a pretty large income stream for you later in life. Maybe it'll cover half your bills in retirement -- maybe less. But either way, it pays to get as much money from the program as possible, and you'll often hear that delaying benefits until age 70 is the best way to do that.
Your Social Security benefits are calculated based on your wages during your 35 highest-paid years in the workforce, adjusted for inflation. You can claim your full monthly benefit at full retirement age, or FRA, which is 66, 67, or somewhere in between, depending on when you were born.
Filing for benefits before FRA reduces them in the process -- up to 30%, in fact, if you claim Social Security at the earliest possible age of 62 with an FRA of 67. But delaying benefits past FRA has the opposite effect -- you get to boost those payments by 8% a year, up until that incentive runs out at age 70.
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It's for this reason that 70 is considered the latest age to sign up for benefits, despite the fact that you won't actually be forced to do so. And if you're low on personal retirement savings, then waiting until 70 to take benefits is a good way to increase your income on a monthly basis. But there's one situation in which you shouldn't wait that long to file for Social Security, and it's if your health is in bad shape. If that's the case, delaying benefits could cause you to lose out on income rather than come away with more of it.
Poor health and delayed benefits don't mix
Here's an interesting tidbit about Social Security: The program is technically designed to pay you the same amount in total lifetime benefits regardless of the age at which you claim them.
At first glance, that might not seem to make sense, but here's the deal: If you file for benefits early, you'll reduce your monthly payments, but you'll collect more individual payments than you would if you waited. If you delay benefits, the opposite happens -- you get more money each month but fewer months of payments.
If you live an average life expectancy, these factors will even themselves out so that you basically get the same total lifetime payout from Social Security. But if your poor health causes you to pass away at an earlier age than the average senior, delaying your benefits could cause you to lose out on lifetime income, despite the fact that you're increasing each monthly payment you get.
Let's explore this concept further with numbers. Imagine you're entitled to a monthly benefit of $1,600 at an FRA of 67. Waiting until 70 to file will give you an additional $384 a month, but you'll also collect 36 fewer payments. If you live until 82 1/2, you'll break even under both scenarios. Filing at 67 and collecting benefits until 82 1/2 will give you a lifetime total of $297,600, as will filing at 70 and receiving benefits until 82 1/2.
But watch what happens when you pass away at age 78, which is a number of years earlier than the average life expectancy for seniors today. In that case, filing at 70 rather than 67 will cause you to lose out on $20,736 of lifetime income despite a higher monthly benefit the entire time you're collecting Social Security.
In fact, in this specific scenario, you'd actually be better off claiming benefits as early as possible. By filing at 62, you'll reduce your $1,600 monthly benefit by $480 a month, which might seem like a lot. But if you only collect benefits until age 78, you'll actually wind up with $215,040 in total. Filing at 67, meanwhile, will give you $211,200, while delaying until age 70 will give you the lowest payout in this scenario -- $190,464.
Be realistic about your life span
If there's no reason to think you won't live a long life, then delaying Social Security until age 70 could be a financially savvy move that pays off throughout retirement. But if your health isn't great, you shouldn't wait to file. While doing so will increase your monthly income, it might not increase your lifetime income, and that's really the number you should focus on.
