Social security experts and financial planners often point out that some people on the verge of retirement can increase their annual social security benefits by up to 76 percent if they wait until age 70 to claim their benefits. While entirely true in some cases, the scenarios under which this kind of increase are feasible are not as numerous as someone might expect. A survey by AARP in 2012 found that less than a third of people approaching retirement age knew the percentage increases of Social Security benefits by delaying and even fewer understood the risks involved.
First, no one should wait until after age 70 to claim Social Security benefits since there is no increase in benefit amount after that age. In other words, if a retiree who delays benefits is set to receive $29,500 annually at age 70, that amount will not increase at age 71, no matter what they do or make in addition. A person on the verge of retirement can claim Social Security benefits starting at age 62.
A 76 percent increase in Social Security benefit amount is possible for single claimants at age 62 who fully delay claiming benefits until age 70 and whose annual income is static between ages 62 and 66. The reason for this is because at age 62, the first year claims can be made, claimants can only receive 75 percent of their total benefit. At age 66 they can receive 100 percent. For every year after age 66 the claimant delays benefits, they receive Delayed Retirement Credits which increase the annual benefit amount. At age 67, claimants can receive 108 percent of their benefits, at age 70, 132 percent. There is no further increase in Delayed Retirement Credits after age 70, another reason delaying benefit claims until after age 70 is not a good idea. A 62-year-old person who delays claiming benefits until age 66 will receive only a 30 percent increase in the benefit amount they would have received at age 62.
Financial planners often talk about maximizing Social Security when making a decision to delay retirement benefits or not. What does that mean? What they mean to say is that the longer one lives past retirement, the more benefit one gets out of Social Security checks. This may seem obvious, living is obviously better, but in the world of retirement age planning there are real numbers behind these ideas. Most planners will say that if a claimant is going to die before age 77, then delaying benefits until age 70 is not a good choice. On average, a claimant needs to receive at least 15 years of Social Security benefit checks in order for them to be “maximized.” This idea is especially important for retirees who suffer chronic illnesses or cancer, or who believe the risks of their death before their Social Security benefits are maximized are high. In short, if claimants believe they will live past age 85, then delaying benefits until age 70 might be a good option.
The magical 76 percent often touted by retirement age financial planners depends on the difference between what single claimants would receive at age 62 and what they would receive if they completely delayed benefits until age 70. If claimants can increase their annual income between the ages of 62 and 66, enough so that their annual Social Security benefit increases even more when delayed to age 70, then its possible to achieve percentage differences even greater than 76 percent. Unfortunately, such retirement age financial strategies are out of reach for most Americans who, when they approach retirement age, often see their annual incomes level off, or even decrease. Appeals are often made to those who believe they will live into their 90s to deplete their 401(k) plans after age 62 in order to bump up their income bracket but, as many financial planners point out, such arguments are difficult to make to people who have spent their lifetimes saving for retirement, and for whom 25 years after retirement seem an unlikely world away.
Increases in Social Security benefits of 76 percent are possible when financial analysts look at the raw numbers and assume people approaching retirement can safely delay benefits to their maximum value, but reality is much more complicated. Longevity and financial health play an important role in the decision when to claim Social Security benefits and understanding the risks of delay.
By Steve Killings