Doing what you can to maximize your Social Security income is a smart strategy if you're at all concerned that you might run out of money in retirement. After all, if you qualify for it, the program is guaranteed to continue paying you a benefit as long as you live.
There are a number of ways to boost the size of your monthly payouts, but one of the most straightforward is to earn delayed retirement credits, which you'll receive if you file for your benefits later than your government-designated full retirement age.
What are delayed retirement credits?
You can earn delayed retirement credits if you've accrued enough work credits to become eligible for Social Security benefits at your full retirement age (FRA), but wait to claim them. For each month you delay filing after you reach your FRA, and up to age 70, your monthly benefits will rise by 2/3 of 1%.
Your FRA depends on your birth year, and for anyone who hasn't retired already, under current law, it will fall somewhere between 66 and 67.
|If You Were Born In...||Then Your FRA Is...||... And You Can Earn Delayed Retirement Credits Starting at...|
|1943-1954||66||66 and 1 month|
|1955||66 and 2 months||66 and 3 months|
|1956||66 and 4 months||66 and 5 months|
|1957||66 and 6 months||66 and 7 months|
|1958||66 and 8 months||66 and 9 months|
|1959||66 and 10 months||66 and 11 months|
|1960 or later||67||67 and 1 month|
How do delayed retirement credits affect your monthly benefits checks?
To gauge the full impact of delaying the point at which you file for Social Security, you need to understand how benefits are calculated. If you retire at your FRA, you'll receive your primary insurance amount (PIA), which is calculated as follows:
- SSA adds up your inflation-adjusted annual wages from your 35 highest-earning years. If you worked for fewer than 35 years, some $0s will be part of your average.
- Only wages up to the Social Security wage base limit -- in 2019, it's $132,900 -- count toward this calculation. Income above that threshold doesn't increase your benefits. On the other hand, the payroll tax that funds the program is not levied on income above that level, either.
- That 35-year sum is divided by 420 to calculate your Average Indexed Monthly Earnings (AIME).
- Your primary insurance amount is calculated by adding 90% of AIME up to a set income threshold + 32% of AIME between a first and second income threshold + 15% of AIME above the second income threshold. Each threshold is called a bend point and these points change annually, although you always receive benefits equal to the same percentage of AIME. Your PIA is determined based on the year you turn 62 and first become eligible for benefits.
- Your AIME will be adjusted to account for wages earned after age 62 and to account for any annual Social Security raises (called cost-of-living adjustments) beneficiaries receive after you turn 62 but before you retire.
This gives you the PIA you'll get if you retire at FRA. If you wait to claim, and thus earn delayed retirement credits, your PIA is adjusted upwards accordingly. If you file for SSI one year late, for example, your 12 months of delayed retirement credits will result in an 8% increase in the size of your checks (2/3 of 1% times 12 months = 8%).
Learning your primary insurance amount
If you log into your account at Secure.SSA.gov, you'll immediately see the SSA's projection of how much your PIA will be at your full retirement age. They put it right on the main entry page:
The further you are from retirement, the rougher that estimate will be, because it's based on the assumption your income levels will be similar to your current salary for the rest of your working life -- and that may not turn out to be true.
The SSA has other tools you can use to estimate your future benefit levels, some of which allow you to change the income assumptions depending on your expectations. But again, the younger you are, the more you should take those estimates with a grain of salt.
Are you eligible for delayed retirement credits?
You can earn delayed retirement credits once you have enough work credits to be eligible for Social Security benefits. The minimum is 40 credits, and you can earn a maximum of four per year, so you need at least 10 years of work history.
The amount of income per credit changes annually. In 2019, you'll need $1,360 in wages or self-employment income for one credit, and you'll max out after earning $5,440. Check the Social Security website to see the income required for the current year.
How much are credits worth?
Since delayed retirement credits are worth 2/3 of 1% per month for anyone born in 1943 or later, your PIA is increased by 8% annually for each year you delay claiming benefits after FRA. Since credits are earned monthly, the longer you wait, the more you can boost your checks as the chart below shows.
|If FRA Is:||And You Wait Until This Age to Claim Benefits||Your Benefits Checks Will Increase by...|
How many credits can you earn?
Since you can only earn credits after hitting FRA, there's a cap on the number of them you can earn:
- If FRA is 66, you can earn credits for up to four years or 48 months and the maximum increase in monthly benefits is 32%.
- If FRA is 67, you can earn credits for up to three years or 36 months and the maximum increase in monthly benefits is 24%.
Those with earlier FRAs obviously have the potential to get a bigger income boost.
How do you calculate the impact of delayed retirement credits?
To understand the impact of earning delayed retirement credits:
- Figure out your full retirement age.
- Determine how many credits you'll earn by calculating the number of months between FRA and the age you plan to claim benefits.
- Multiply the number of months of delay by the value of full retirement credits -- ((2/3) x .01). This will tell you the percentage increase of your primary insurance amount.
- Multiply your PIA by the percentage increase to find out how much higher your benefit checks will be.
Here's an example if FRA is 67, your PIA is $2,000 and you want to see how credits affect your checks if you retire at 69.
- The number of months between the age you plan to claim benefits (69) and your FRA (67) is 24.
- Multiply 24 x ((2/3) x .01). This gives you .16, which is a 16% increase in benefits.
- Multiply your PIA by the percentage increase. $2,000 x .16 = $320.
Your monthly benefit check at age 69 would be $2,320 because of the $320 increase.
Larger monthly checks, but not necessarily a larger total payout
The table below offers some rough examples of how much your monthly benefits would increase, based on a few scenarios.
|If Your FRA Is...||And You Claim Benefits at...||A $1,000 PIA Would Increase to...||A $1,500 PIA Would Increase to...||A $2,000 PIA Would Increase to...|
It's important to note these increases in monthly benefits don't necessarily mean you'll receive more in total income from the retirement program via delayed retirement credits.
The payout formulas the Social Security system uses are designed so that a beneficiary who lives to an average age will receive the same amount of total income from the program, regardless of when they first file for benefits. If you claim early, you'll receive a larger number of individual checks, but smaller ones. If you claim later, the larger size of those monthly checks will more or less be offset by the months or years of missed income.
So, if you die at the age when the actuarial tables suggest you will, there will be almost no difference in the sum of the retirement benefits you receive, regardless of how old you are when you start receiving them. However, those whose lifespans turn out to be shorter than average would do better by claiming early. And those who live longer than average will more than make up for the checks they miss by waiting; they'll gain a greater total payout from the program thanks to their delayed retirement credits.
How do delayed retirement credits affect Social Security raises?
Earning delayed requirement credits also affects cost-of-living adjustments (COLAs) -- the periodic raises that are meant to prevent retirees' benefits from losing purchasing power. COLAs are determined based on changes to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), and are calculated as a percentage of benefits a retiree has been receiving. A larger monthly benefit naturally translates to a larger raise.
In 2019, for example, there was a 2.8% COLA. Here's how this raise would affect your income, depending on the size of your initial checks:
- If you were receiving $1,000 per month, your 2.8% COLA would increase your income by $28 (2.8% of $1,000).
- If you were receiving $1,160, your COLA would increase your income by $32.48.
- If you were receiving $1,240, your COLA would increase your income by $34.72.
- If you were receiving $1,320, your COLA would increase your income by $36.96.
This may not seem like a ton, but a $36.96 per month increase is $107.52 per year more than a $28 increase. Over 10 or 20 years, even small incremental increases can add up.
Is it always worth waiting to earn delayed retirement credits?
When you earn delayed retirement credits, you trade months or years of missed income for a higher monthly benefit later. You might end up receiving more money in the long-term -- but only if you live long enough to break even. And, remember, the design of the system is meant to ensure you don't receive more over your lifetime unless you outlive your projected life span.
To figure out when you'll break even:
- Calculate the monthly benefit you'd receive at the age you're thinking about retiring
- Determine how many months of income you'd forgo if you wait
- Calculate total income missed by multiplying the lower monthly benefit received at the younger age times months of income missed
- Figure out the monthly benefit you'd receive if you delayed
- Determine how much higher your monthly benefit is due to waiting by subtracting the lower monthly benefit at the younger age from the higher benefit you get thanks to delayed retirement credits
- Divide total income missed due to delaying by the difference between the higher and lower monthly benefit
Say FRA is 66, you're thinking about retiring at 68, your PIA is $1,000, and you're trying to figure out how long it would take to break even if you delay claiming until 68.
- The monthly benefit you'd receive at the age of 66 is $1,000 (the same as your primary insurance amount because 66 is your FRA).
- If you claim benefits at 68 instead of 66, you forgo 24 months of income.
- The total income you won't receive is $24,000 ($1,000 per month x 24 months of missed benefits).
- Your higher benefit at age 68 due to waiting is $1,160 (your primary insurance amount of $1,000 increased by 16% thanks to the two-year delay).
- The difference between your higher benefit from waiting and your lower benefit is $160 ($1,160-$1,000).
- Divide $24,000 in missed income by $160 per month in higher benefits to find you'd need to receive the extra $160 for 150 months to make up for the missed income.
If you live for 150 months in retirement after you file for benefits, you'll break even. If you live longer than that, you profit from having delayed.
Things get more complicated if you're contemplating retiring before full retirement age
This calculation gets more complicated if you're thinking about retiring before your FRA. Claiming Social Security early results in a reduction in the size of your monthly benefit of about 6.7% per year for three years closest to your FRA and by an additional 5% for each prior year.
Delaying can increase your benefits in other ways
There's another way waiting to claim could increase your Social Security checks. Benefits are based on your average wages from the 35 years you earned the most, so if you're making much more now than you did earlier in your career (after adjusting for inflation, of course), working a few more years means you replace low-earning years with higher-earning ones in your calculation. This can raise your AIME used to determine your PIA. You can see some specific examples of this in this guide to how much waiting to claim increases your Social Security benefits.
Of course, if you're actually earning less now -- say, because you're working part-time or because of the trajectory of your career -- then you won't get this benefit.
Now you understand how delayed retirement credits work
Social Security benefits are designed to replace about 40% of pre-retirement income, and an estimated 62% of beneficiaries receive more than half their income from this entitlement program. Since even small increases or decreases in your budget can make a tangible difference in your financial well being, it's important to understand how delayed retirement credits work when deciding the age at which you'll claim your benefits.
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