Social Security Benefits – The Top 4 Reasons To Delay Claiming

According to the Center for Retirement Research, at Boston College, 42% of men and 48% of women claim their Social Security benefits at age 62, the soonest they can apply. But is that a wise thing to do? In some cases, yes. In other cases, no. Here I'll offer the top 4 reasons to delay claiming Social Security Benefits.

Keep in mind that for many people, Social Security is their only source of guaranteed retirement income. If for whatever reason, you need to retire early, that may be your only option for income. In that case, applying early makes sense.

However, if you can delay claiming Social Security benefits, it will mean a much higher income.

Before getting into the top 4 reasons to delay claiming, let's talk about how your benefit gets calculated.

Social Security Benefits – The Calculation Formula

Step 1 – Determine the Highest 35 Years of Income

The method for calculating Social Security retirement benefits is not simple.

At age 62, Social Security (SSA) determines your highest 35 years of earnings (indexed for inflation). If you left the workforce for an extended period, your work record would show years where you earned no income.

This is often the case with stay-at-home moms who leave the workforce to raise their children. After the kids are out of school, they often want to go back to work.

However, the gap in the non-working years (which could total 18 years or more) results in several years of zero income. If she has 35 years or less of working years, those years of zero income will be included as part of the calculation. You should always check your earnings record for accuracy.

Step 2 – Determine the Average Indexed Monthly Earnings (Aime)

SSA uses the AIME as the basis to calculate your primary insurance amount (PIA). The PIA is the amount you will receive when you reach your full retirement age (FRA). For baby boomers born between 1943 and 1954, your FRA is age 66. If you were born after January 1, 1955, two months is added to your FRA for each succeeding year. Anyone born after 1960, has an FRA of age 67.

SSA sets a maximum taxable earnings amount each year. You pay no SS taxes for income over the maximum. For 2018, that number is $128,400.

When SSA gets the 35-year total income, they divide that total by 420 (35 years X 12 months = 420). That number is your AIME.

They then apply a formula using something called bend points (explained below) to calculate your PIA. Social Security is a progressive system. As such, SSA credits a higher percentage of lower incomes when calculating the PIA.

Step 3 – Calculate the Primary Insurance Amount (Pia)

The best way to illustrate this is by example:

  • Baby Boomer born in 1956
  • Maximum Social Security earnings every year since age 22
  • AIME = $9,937
  • PIA formula:
    • $895 (first bend point) x .90 = $805.50
    • $4,502 x .32 = $1,440.64 ($5,397 (the second bend point) – $895 (first bend point) = $4,502)
    • $4,540 x .15 =    $680.95 ($9,937 – $5,397 (second bend point)= $4,540)
    • Total = $2,927.09

PIA = $2,927.00 (Amount worker will receive at full retirement age)

* Example courtesy of Elaine Floyd, CFP, Horsesmouth

You can clearly see the highest percentage credit of the bend points (90%) goes to the lowest levels of income. The crediting percentage goes down for the next two bend points. The total of the three calculations is your PIA.

Now that we know the formula to calculate your PIA, it's time to look at the top 4 reasons to delay.

Reason #1 – Claiming Early Reduces Your Social Security Benefit by as Much as 30%

For those born after 1960, your FRA is age 67. If you decide to claim your retirement benefit at the earliest possible time, age 62, your benefit amount takes a 30% hit! (see chart below under reason #4)

Let's say your PIA at age 67 is $2,000. Claiming at age 62 reduces that benefit to $1,400. If you live until age 90, that reduction in benefits costs you $165,600 in lost income ($2,000-$1,400=$600 x12 x 23 years). That's a HUGE hit! Even if you only live until age 82, you lose $108,000 ($7,200 x 15) from the reduced monthly payout!

Also, if you apply early and still work, you could lose $1 for every $2 in benefits if your income exceeds certain levels (the earnings test). Granted, once you reach FRA, that money gets added back, spread over your lifetime. However, the reduction from the time you apply to FRA could be substantial based on your earned income. See What happens if I work and get Social Security retirement benefits? to learn more.

Primary Reasons for Applying Early

The most common reason comes from folks who say they're going to claim before Social Security runs out of money. If that's what you believe, I encourage you to read Is Social Security Really Going Broke? and get the facts.

Are there financial concerns? Of course. Are they enough to cause you to claim early? In my mind, no. As you see from the above example, that decision can be extremely costly!

Another one I hear is something to the effect of, “I'm not going to live past 80, so I mind as well get it now.” Fair enough. Maybe you have a family history of short life expectancies that causes you to think this way. What happens if you don't die when you think? Last time I checked, none of us has control over when we leave this world. This can cost you serious money, OK?

The Most Legitimate Reason

The most legitimate reason for claiming Social Security early comes out of financial need.

Many people have to retire before they are ready due to their jobs getting eliminated, health, and many other reasons out of their control. In that case, claiming early may be the best option.

That said, you should still analyze your options, especially if you're married. You may be eligible for spousal benefits. It may make sense for your spouse to apply and for you to wait.

Best practice – don't rush to make the decision. Look at all of the options first.

Reason #2 – Claiming Early Reduces Survivor Benefits

SSA bases your survivor benefits on two things:

  1. The age at which the deceased spouse claimed their benefit.
  2. The age at which the widow (er) claims the survivor benefit

Let's break each one down.

#1 – The deceased spouse's age. If requested before reaching FRA, the benefit will be the higher of the deceased spouse's benefit or 82.5% of their PIA. However, if they claim after FRA, they will get delayed retirement credits added to the benefit (see reason #4).

#2 – The surviving spouse's age. If the surviving spouse claims their benefit before they reach FRA, penalties can be pretty steep. Deceased spouse's get an exception to the age 62 minimum. A surviving spouse may apply for benefits as early as age 60. If so, they will only get 71.5% of what the benefit would have been by waiting until FRA. Waiting until after reaching FRA means they will receive 100% of the original benefit.

Rules To Be Eligible for Survivor Benefits

  1. Must have been married for at least nine months
  2. To apply, the survivor must be at least age 60 (reduced benefit) or FRA (for full benefit)
  3. The survivor benefit is not available if the survivor remarries before age 60 (unless the marriage ends)
  4. The survivor would qualify for a divorced spouse survivor benefit if the marriage lasted at least ten years

Best practice – if you're married, be sure to consider the survivor benefit when applying for your own.

Reason #3 – Claiming Early Reduces Spousal Benefits (If Eligible)

Until the passing of the Bipartisan Budget Act of 2015 (BBA), spousal benefits were a favorite way to increase Social Security benefits. The most popular method was the file and suspend strategy.

In this strategy, at FRA, one spouse would file for and immediately suspend their benefit. At the same time, they would file a restricted application for a spousal benefit.

The spousal benefit, if claimed at or after FRA, paid the other spouse 50% of their PIA. This allowed the receiving spouse's own benefit to earn delayed retirement credits (8% per year) from age 66 (their FRA) until reaching age 70.

The lifetime benefit from this strategy added up to hundreds of thousands of additional dollars of income. BBA eliminated the file and suspend strategy. It did not, however, end spousal benefits entirely. Depending on your date of birth, you may still be eligible for a spousal benefit.

Spousal Benefit Rules After Bba

The payout rate for the spousal benefit is still the same after BBA (50% of the primary worker's PIA if claimed at full retirement age). After BBA, the primary worker must have filed for their benefit (cannot suspend) for the spouse to get the spousal benefit.

Just like the retirement benefit, the spousal benefit amount will be reduced if you apply for the spousal benefit before FRA. Like applying for your own benefit, you must be at least age 62 to get the spousal benefit.

Here's where the rules draw the line on age. If you were born on or after January 2, 1954, you can't “restrict” your application and only file for a spousal benefit. If born after that date, when you claim Social Security, you're are deemed to be filing for all benefits for which you are eligible.

That means if you are eligible and apply for your retirement benefit before reaching FRA, the benefit is reduced. However, if your spouse dies before you and their benefit is larger, you can switch to the larger survivor benefit once you reach full retirement age.

Best practice – if you're married, be sure to consider the spousal benefit when applying for your own. The rules have changed. It's still worth a look.

Reason #4 – You Lose Deferred Retirement Credits

Delayed retirement credits are a huge benefit of waiting to claim.

SSA adds 8% per year to your benefit every year you wait from your FRA until reaching age 70. That means if you have a PIA of $2,000, waiting until age 70 brings that benefit to $2,640. If you live until age 90, that adds $184,320 to your lifetime income!

If your FRA is age 67, your delayed retirement benefits grow for three years instead of 4. That still increases your benefit by 124% to $2,480. Live to age 90, and you add another $132,480.

And remember, your survivor's benefit is based on the benefit you were receiving at death. So, waiting means your surviving spouse will enjoy a higher income as well.

Here's a chart to help you visualize.

PIA of $2,001 Benefit % Benefit %
Apply at age PIA age 66  Dollars PIA age 67  Dollars
62 75.0%  $ 1,500.00 70.0%  $ 1,400.00
63 80.0%  $ 1,600.00 75.0%  $ 1,500.00
64 86.7%  $ 1,734.00 80.0%  $ 1,600.00
65 93.3%  $ 1,866.00 86.7%  $ 1,734.00
66 100.0%  $ 2,000.00 93.3%  $ 1,866.00
67 108.0%  $ 2,160.00 100.0%  $ 2,000.00
68 116.0%  $ 2,320.00 108.0%  $ 2,160.00
69 124.0%  $ 2,480.00 116.0%  $ 2,320.00
70 132.0%  $ 2,640.00 124.0%  $ 2,480.00

The difference between claiming at age 62 and age 70 for some whose PIA is age 66 is $1,140 per month. Claiming early would cost you $273,600 in lost benefits if you live until age 90.

None of these calculations account for increases due to inflation. SSA uses a 2.6% rate of inflation. If we average 2.6% inflation, that will make a huge difference in your lifetime benefit, adding even more to the costs of claiming early.

Best practice – do the math and look at all the claiming options before deciding.

Final Thoughts

Social Security has a complicated system of rules. I hope you see how important it is to think through and analyze the claiming decision. Not doing so can cost you tens of thousands, in some cases, hundreds of thousands of dollars over your life expectancy.

The claiming decision should not be made in a vacuum. Always coordinate the Social Security claiming decision with your overall retirement income planning.

I outline a process to follow in my article Retirement Income Planning – What You Need to Know. You will find links to Social Security analyzing tools and retirement planning calculators to help you determine the best method to claim.