The monthly Social Security benefit you're entitled to is based on your lifetime earnings -- specifically, the wages you paid taxes on during your 35 most profitable years in the workforce. But the age at which you claim Social Security will dictate whether that monthly benefit stays the same or goes up or down.
If you file for benefits at full retirement age, or FRA, you'll get the exact monthly amount your earnings history entitles you to. FRA is either 66, 67, or somewhere between those two ages, depending on what year you were born. But you don't have to claim benefits at FRA -- you can file as early as age 62, or delay benefits past FRA. If you file early, you'll reduce your benefits in the process. But for each year you hold off on claiming benefits past FRA, you'll boost them by 8%, up until age 70.
Surprisingly, despite this incentive, less than 4% of Americans claim benefits at 70. But if you delay your filing to any degree past FRA, you may land in the following scenarios that ultimately serve you well.
1. You'll be tempted to work longer
Unless you have a large amount of retirement savings, delaying benefits may not be possible without a steady paycheck. As such, if you hold off on claiming Social Security past FRA, you may wind up spending a little extra time in the workforce. And that can be helpful for a number of reasons.
First, if you're earning a lot more money at the end of your career than at the beginning, you'll potentially increase your Social Security benefits by replacing a year or two of lower earnings with higher earnings. Furthermore, working longer will allow you to not only pad your nest egg, but leave your existing balance untouched. Finally, working longer might help you reap some of the peripheral benefits of holding down a job, like the exercise involved in your commute or the social interaction associated with office life. And these things could, in turn, help keep you physically and mentally healthier.
2. You'll have more financial freedom during retirement
Boosting your income on a monthly basis could make your retirement lifestyle a lot more enjoyable. Imagine you're entitled to a $1,500 monthly benefit at an FRA of 67. Waiting until 70 to file will increase each payment you collect to $1,860, and that extra $360 a month could allow you the option to travel more, spend extra on entertainment, or enjoy some wiggle room during periods when your healthcare expenses or other bills are higher than usual.
3. You'll boost your lifetime income if your health is terrific
One lesser-known point about Social Security is that it's designed to pay you the same amount of total lifetime benefits regardless of when you initially claim them. While filing early reduces your benefits on a monthly basis, you also collect more individual payments in your lifetime. And though filing after FRA increases your monthly benefit, you collect fewer individual payments.
That break-even setup, however, assumes that you'll live an average life span. But if your health is great and you end up living a long life, you'll come out way ahead financially by delaying your benefits as long as possible.
Going back to our example of a $1,500 monthly benefit at an FRA of 67, we saw that waiting until 70 resulted in a monthly $1,860 benefit instead. If that's the case, and you live until 82 1/2, which is mostly in line with today's life expectancies for seniors, you'll break even with a lifetime total of $279,000 in Social Security income regardless of whether you file at 67 or 70.
But watch what happens when you live until age 90. At that point, you'll come out $32,400 ahead by virtue of filing at 70. And that's a nice chunk of extra income to collect in your lifetime.
It pays to wait
Some seniors have no choice but to claim Social Security on time or early. And if your health is poor and you're unlikely to live a long life, filing early actually makes sense. But if there's nothing driving you to start collecting benefits at or before FRA, then it generally pays to hold off as long as possible, because as you can see, the upside is huge.