In case you hadn't heard, 70 is the new 60 with respect to retirement. And that's not entirely anecdotal. A study from Stony Brook University confirms that as lifespans increase, people are staying healthier into older ages. That's a great thing, because it gives more seniors access to Social Security's most fruitful feature: Delayed retirement credits.
Delayed retirement credits
Delayed retirement credits are the No. 1 reason to wait until age 70 to claim your Social Security retirement benefits. Here's why. Up to age 70, your benefit increases by two-thirds of 1% for each month past your Full Retirement Age (FRA) that you don't collect Social Security. Your FRA is between 66 and 67, depending on your birth year.
If you were born in 1954, for example, you can accrue delayed retirement credits for 48 full months, from your FRA at 66 until age 70. At two-thirds of 1% per month, that totals a 32% increase to your Social Security benefit. If you stand to get $1,500 monthly at age 66, waiting four years increases your benefit by $480 to $1,980.
What a higher Social Security benefit is really worth
Now, here's the interesting part. A $480 monthly boost from delayed retirement credits adds up to $5,760 per year. If you decide to claim at FRA instead of waiting until 70, that money comes from somewhere else -- probably, your savings account. Assuming you're withdrawing 4% of your savings balance each year, you'd need an extra $144,000 in your portfolio to cover an additional $5,760 in annual distributions.
Of course, you are giving up three or four years of Social Security payments to get those delayed retirement credits. And that also has value. Four years at $1,500 monthly totals $72,000, which offsets a big chunk of the income boost you get for waiting.
You can easily do this math on your own in four steps:
- First, create an account at my Social Security.
- Once you log in, you will see your benefit at FRA and at age 70. Calculate the difference between the two. Note that the increase might be more than what's outlined in the table above. Adding more high-income years to your work record also pushes your benefit higher.
- Multiply the difference by 12. The result is your estimated annual benefit increase for waiting until 70 to claim.
- Divide the estimated annual increase by 0.04. The answer is the savings balance needed to support that annual withdrawal amount, assuming a withdrawal rate of 4%.
- Now compare what you're giving up by delaying your benefits. Take your estimated benefit at FRA and multiply it by the number of months between FRA and your 70th birthday.
When delayed retirement credits are applied
There's one more advantage to claiming your benefits at age 70. It has to do with when your delayed retirement credits are applied.
Before you are 70, Social Security applies your delayed retirement credits in January following the year you earned them. In the month of your 70th birthday, Social Security updates your benefit to reflect all previously unapplied credits.
Here's what that means in practice. When you claim at 70, you get the boosted benefit right away. Claim before 70 and you may have to wait.
Let's say your FRA is in April. You file in September of the same year. You might expect to see five months of delayed retirement credits added to your benefit right away. But alas, no. Through the end of the year, you'll receive your benefit as if you'd claimed in April. You won't see the effect of your delayed retirement credits until the following January.
Worth the wait
If your health allows it, delaying Social Security can take pressure off your savings and add breathing room to your retirement budget. Put it off until age 70 and you'll be rewarded with a 24% to 32% increase to your monthly income. Talk about good things happening to those who wait!