Understanding Social Security: How much does my Social Security benefit increase when I delay filing?

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A recent email reads (in part) as follows:

I am approaching age 62 when I can file for my Social Security. I have heard that if I file at age 62 my benefit will be penalized the most, and that if I wait to file my benefit will increase by 8% for every year that I wait.

Is this correct?

Dear reader, 

You’re partly correct, and you’re on the right track with the rest of your statement, just a little off on the exact amounts.

It is true that if you file for your Social Security benefit at age 62 your benefit will be reduced to the minimum amount. It is also true that for each year that you delay, your benefit will increase, but it’s not always by 8% per year.

Read more about Social Security on MarketWatch

To better understand the year-over-year increases, we need to review the rules about the early-filing reductions. For the 36 months nearest to your Full Retirement Age (67 for folks born in 1960 or later, a bit less for those who were born earlier), the reduction amounts to 5/9 of 1% for each month. So if you file exactly 36 months (3 years), before your Full Retirement Age (FRA), the reduction to your benefit will be 20%. We get this result by multiplying 5/9% by 36 (180/9 = 20).

For any months greater than 36 before your FRA, the reduction is calculated as 5/12 of 1% per month. Effectively, this results in a 5% reduction in benefits for each 12-month period greater than three years before your FRA.

The maximum reduction in benefits occurs when you file for Social Security benefits at age 62, your earliest age of eligibility. If your FRA is 67, age 62 is 60 months (five years), before your FRA. So we know that there will be a reduction of 20% (since it’s more than 36 months) plus the additional months greater than 36. 60 months minus 36 months equals 24 months. The reduction for this additional 24 months is 10%, as 24 times 5/12% equals 10% (120/12 = 10).

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Then later, after FRA, there is another type of increase, called a Delayed Retirement Credit. This credit is 2/3% per month, for a total of 8% for every year of delay. (This is where the 8% increase for each year of delay comes from, but it doesn’t exactly work out like you’d think. Read on.) To learn more about Delayed Retirement Credits, click this link. 

In order to understand how much your benefit will increase for each year of delay (starting at age 62) we need to calculate the benefit amounts at each age level and compare. I’ve put these in the following table, along with the year-over-year increase percentage:

Age

Benefit amount

Year-over-year increase

62

$700

63

$750

7.14%

64

$800

6.67%

65

$866.67

8.33%

66

$933.33

7.69%

67

$1,000

7.14%

68

$1,080

8%

69

$1,160

7.41%

70

$1,240

6.9%

This table is based on someone who has a FRA of 67, and this person’s benefit available at age 67 (also known as the Primary Insurance Amount, or PIA) is $1,000. You can see this by looking at the age 67 line, showing $1,000 of benefit.

Annual COLAs (Cost of Living Adjustments) have not been factored into this table, as that would complicate matters and make it incomprehensible.

As displayed in the table, the actual increase year-over-year ranges from as little as 6.67% up to 8.33% — it’s not always an 8% increase year-to-year. In fact, even though 8% is quoted quite often (because it’s the amount used for the calculation of DRCs), there is only one year-over-year period when the increase is exactly 8%, and that is the first year after your FRA. This is because the DRC increases are not compounded, but rather accumulative. The 8% delay credit for each year is simply added to the previous year’s 8%, so two years’ delay is 16%; three years is 24%, and so on.

Because of this accumulative nature of the increase, the year-over-year rate of increase is less than 8% for each subsequent year.

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