When delaying your Social Security benefits pays off

Two factors play a significant role in determining the amount of Social Security benefits you'll receive in retirement: the amount of income you've earned over your lifetime and when you choose to start collecting benefits. The more income you've had and the later you begin collecting retirement benefits, the larger your monthly check from Social Security.

As you near your retirement years, it's hard to make a big improvement in your lifetime earnings. However, the impact of your age when you begin collecting benefits can be more significant than you think. Even though most seniors are eligible to collect benefits as early as age 62, that's not usually the best option. You'll get a lot less from Social Security at that age than what you would get if you can wait until full retirement age (FRA), which is the age when you would receive unreduced benefits. 

Indeed, the vast majority of retirees start taking their benefit at the wrong time, losing out on about $111,000 per household, according to a new from United Income, an online investment management and financial planning firm.

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FRA is age 65 for people born before 1938. For those born from 1938 to 1942, FRA gradually increases to 65 and 10 months. For those born from 1943 to 1954, FRA is 66. For those born from 1955 to 1959, FRA gradually increases to 66 and 10 months. FRA is 67 for everyone born in 1960 and after.

If you claim benefits before reaching your FRA, you'll receive a permanently reduced monthly benefit for the rest of your life. If you can wait until your FRA, your monthly benefits won't be reduced. Assuming an average life expectancy, for many people the total lifetime benefits received under either scenario are financially similar, so you can't go terribly wrong in making this decision.

But if you have a spouse and it's possible that he or she will outlive you, it may be a good strategy to have the older spouse delay taking Social Security to receive unreduced benefits. That's because the benefit ultimately paid to the surviving spouse will be larger.

Another alternative -- especially for anyone who plans to keep earning income and doesn't need to commence retirement benefits upon reaching FRA -- is to put off taking Social Security and raise your benefit by accumulating more earnings and taking advantage of the delayed retirement credit. This can have a significant impact because the DRC is an increase in monthly benefits for each year beyond your FRA (up to age 70) that you delay receiving benefits.

If you were born in 1943, your retirement benefit can be increased by 8% annually for each year you delay beyond your FRA. The DRC percentage increase varies based on your date of birth, so you'll want to check with Social Security to know how this will affect your benefits.

If you're thinking about waiting, say to age 70, to claim your Social Security benefits, here are a few things to know:

First, if you've delayed claiming benefits, Social Security won't automatically start sending you monthly checks when you reach age 70. You'll have to file your claim then. And don't wait beyond age 70, because your benefit won't go up after that age, and Social Security will pay only a maximum of six months of retroactive benefits.

When you file a claim for Social Security, the benefits don't arrive instantly. The time from processing your claim to receiving your first check is typically about three months. So if you want to receive your benefits in the month after your 70th birthday, contact Social Security to claim benefits at age 69 and 9 months.  

Remember, by delaying your retirement benefit until age 70, you are potentially increasing the future survivor benefit of your spouse. That's because the benefit a surviving spouse receives is 100% of what the deceased spouse was receiving (or entitled to receive at the time of death), including any delayed retirement credits. In a married couple's situation, when one spouse dies, the bigger monthly benefit continues, and the smaller benefit stops.

Also note that most retirees have their monthly Medicare premium automatically deducted from their monthly Social Security benefits. But if you've elected to delay claiming benefits beyond age 65, you'll need to pay the Medicare premiums directly.

The three scenarios

To make the best decision on whether to delay taking Social Security retirement benefits, you first need a clear understanding of the benefits you could receive under three scenarios described above.

• Reduced benefits at age 62
• Full benefits at FRA
• Increased benefits at delayed retirement, anytime after FRA up to age 70

One of the most important things to consider is how long you expect to live. If you think you'll have a shorter-than-average life expectancy, delaying benefits beyond FRA may result in less total benefits received over your lifetime. You also need to consider your earned income and your income tax situation. Also remember that your Social Security benefit is typically increased by a cost of living index each year.