Chris Stein, CFP®
Waiting to Claim Your Social Security (Part 1)
Depending on your circumstances, waiting to claim your Social Security benefits can have its advantages. You can generally begin receiving your Social Security retirement benefits anytime between age 62 and 70. Of course the earlier you file, the less you will receive; while the longer you wait, the more you will receive. This is because your lifetime benefits are based on your age when you file and your Primary Insurance Amount.
If you file at age 62 you will generally receive 25-30% less than your PIA amount which is available to you at your Full Retirement Age. For most people reading this blog your FRA is most likely between age 66 and 67. If you wait past your FRA your benefits are increased at 8% per year until age 70, when you are eligible to receive your largest retirement benefit.
How Does Claiming Age Affect Benefits
To understand how your claiming age affects your benefits, let’s look at a very simple example. Assume a 62 year old woman has a FRA of age 66 and a PIA of $1,000. If this woman waits until age 66 she will receive her full PIA of $1,000 as her monthly benefit. If she files for her benefits prior to age 66 her monthly benefit will be reduced below her PIA, and if she claims after age 66 her benefit will be based on an amount increased from her PIA. Let’s also assume she was never married and has no young dependents so there are no other claiming options for her.
If she claims her retirement benefits at age 62, her benefits will be reduced by 25% from her $1,000 PIA. If she files at age 63 her benefits will be reduced by 20%, at age 64 the reduction is 13.30% and at age 65 she will face a reduction of 6.70%. That said, one of the biggest misconceptions is that the reductions are always annual in nature. In other words if the woman in our example files at any time during the year she is 62 her benefits will always be 25% less than her PIA. However, in reality her (and your) adjustments are made monthly.
Reward, Not a Penalty
The easiest way to explain how the SSA adjusts your benefits monthly is to view the adjustments as a reward and not a penalty. In other words, don’t consider the adjustments a penalty for claiming before age 66, but instead a reward for claiming after age 62! Again, back to the woman in our example; we know if she claims at age 62 her monthly benefit will be $750.00, (a 25% reduction from her age 66 PIA of $1,000) so let’s use $750.00 as the beginning point. If she delays claiming her Social Security benefits for the first 12 months after she turns 62 the SSA will increase her benefits by 5/12% of her PIA for every month she delays her claim. Then at age 63, and for the next 36 months after that, the SSA will increase her benefits by 5/9% of her PIA for every month she continues to delay claiming her retirement benefits.
If you add all those percentages and fractions together the net result will actually equal $1,000 when she reaches age 66! But we understand fractions are confusing, so let’s look at dollars. For the first 12 months after she turns 62 she will receive 5/12ths of $1,000 or $4.17 each month she delays. After one year, at age 62 she would be entitled to receive an additional $50.00 in monthly benefits, or $800 total. ($4.17 x 12 = $50.00) And that $800 in monthly benefits at age 63 just happens to equal the 20% reduction in her $1,000 PIA she would be subject to if she claims at age 63! Beginning after age 62 and for the next 36 months up to her FRA of age 66 her benefits will be increased by 5/9% of her $1,000 PIA or $5.56 more for each month she delays.
It does not matter when you turn on your benefits. The SSA will increase you monthly benefits based on those fractions for each month you delay claiming past age 62. Also, keep in mind we are not factoring in Cost of Living Adjustments in this example to keep things simple, but in reality she will also receive COLA adjustments.
There is more to know about this waiting game, so please use the play button below to learn how the SSA determines your benefits right down to the month you retire.
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