Your Social Security benefits are calculated based on how much you earn during your 35 highest-paid years in the workforce. From there, you're entitled to your full monthly benefit based on those earnings once you reach full retirement age, or FRA. That age is either 66, 67, or 66 and a specific number of months, depending on the year in which you were born.
Claiming benefits at FRA isn't mandatory, though. In fact, you're allowed to file for Social Security as early as age 62 or you can delay benefits past FRA. If you file early, you'll shrink your benefits in the process. But if you hold off on claiming benefits past FRA, you'll boost them by 8% for each year you do, up until you turn 70.
As such, you'll often hear that it's wise to delay benefits as long as possible, and for many seniors, that's good advice. If you're entering retirement without much in the way of personal savings, for example, then claiming benefits at a later age can help compensate and help you avoid financial problems. Filing beyond FRA can also buy you more flexibility later in life, even if you have a decent chunk of savings. A boost in benefits could make it possible for you to travel or simply enjoy retired life a bit more.
But while delaying Social Security is a move that often works out well, in some cases, doing so could actually cause you to lose money. And that's the last thing you want.
When delaying Social Security doesn't make sense
Social Security is technically designed to pay you the same lifetime total regardless of when you initially claim benefits. The logic is that filing early won't really hurt you because a lower monthly benefit will be offset by the greater number of individual payments you'll collect. And on the flip side, filing late means losing out on a few years of payments, so even though you're getting more money each month, things should basically break even.
This formula, however, hinges on one key thing -- and it's that you live an average lifespan. But if you pass away at an earlier age than the typical senior, you'll actually end up losing out on lifetime benefits, despite having secured a larger benefit on a monthly basis.
Here's how that might play out. Imagine you're entitled to a monthly benefit of $1,500 (which is basically what the average senior today collects) at an FRA of 67. Filing at age 70 will give you $1,860 a month instead, but you'll collect 36 fewer payments. You'll break even in both filing scenarios at age 82 1/2 with $279,000 in lifetime Social Security income. But if you only live until 77, which is a good seven to nine years below typical life expectancy (roughly age 84 for men and 86 for women), you'll actually lose out on almost $24,000 in lifetime Social Security income by claiming benefits at 70 rather than filing at FRA.
That's why you shouldn't jump to the conclusion that delaying benefits is always a great idea. If you have health issues or a family history of dying young, then you may actually be better off filing for Social Security before FRA.
Look at the big picture
The idea of an 8% annual boost in benefits is unquestionably appealing. But remember, while delaying Social Security might boost your monthly benefit, it won't necessarily increase your total lifetime benefit. Keep that distinction in mind as you make your filing decision.