Your Social Security benefits may turn out to be the flagship of your retirement income. Filing for benefits even a few months late or early, though, and you can significantly increase – or cut – your income. Here’s what to know and how to avoid tripping up.
This delay can change all benefits, including your own or the payouts to your surviving spouse or children (including the Social Security spousal and survivors’ benefits). This applies whether you take the benefit before your Full Retirement Age (FRA) or after, since the Social Security Administration calculates your age according to the number of individual months.
Increase or reduction factors apply for each month of delay or early application.
Early application. A reduction factor applies for each month prior to your FRA (67 for anyone born after 1960) that you file. For the 36 months prior to your FRA, your benefit drops slightly more than one-half of 1%. Applying a full 36 months prior to your FRA results, for example, in a 20% reduction of your monthly benefit.
For each month greater than 36, Social Security cuts your benefit slightly less than one-half of 1%; applying an additional year early therefore creates a reduction of 5% in addition to the 20%.
For each month after age 62 that you delay applying, you increase the amount of your actual benefit. Delaying to age 63, for instance, eliminates 5% of the reduction compared with filing at age 62. If your FRA is 66, delaying to age 64 eliminates an additional 6.66% of reduction in your money, as will delaying each additional year up to your FRA.
The key: Even a few months’ delay can increase your benefit. And the amount of your benefit when you file remains permanent unless some other factor, such as suspending your benefit or your working while receiving benefits, changes it.
Delayed application. When you delay applying for benefits past your FRA, you increase your benefit above your primary insurance amount (PIA), the amount one receives when filing for benefits at FRA. These increases are called Delayed Retirement Credits (DRCs).
DRCs are better than the increase (or rather, the lack of a decrease) that you receive if you delay filing after you turn 62. For each month you delay, your benefit increases two-thirds of 1%, for a total increase each year of 8% (a little less for folks born prior to 1943).
Make every month count. If you can delay filing even a few months you can make a long-lasting difference in your lifetime benefits – and potentially for the benefits of your surviving spouse or children, as well.
Note: Your DRCs accrue until you turn 70, when you max out your factors to increase benefits. Of course, if you still work and earn up to that age, your overall income increases.
Suffice to say you earn no additional DRCs after 70, the latest age when you ought to file for retirement benefits.
(You can also listen to my podcast on delaying’s effect on benefits.)
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Jim Blankenship, CFP, EA, is an independent, fee-only financial planner at Blankenship Financial Planning in New Berlin, Ill. He is the author of An IRA Owner’s Manual and A Social Security Owner’s Manual. His blog is Getting Your Financial Ducks In A Row, where he writes regularly about taxes, retirement savings and Social Security.
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