Source: Social Security Administration

Those are big hits for waiting just a few extra years. For example, if you were born in 1961 and file for benefits at age 62, your monthly benefit will be 30 percent less than if you had filed at your full retirement age of 67.

Once you file for your benefits, you’re stuck with your paycheck, though annual cost of living adjustments may push the monthly benefit higher. However, you do have 12 months from when you file to withdraw from the program, but you’ll have to return any money you’ve received.

Here’s the not-so-secret formula behind how Social Security benefits are calculated.

For those who are able to do so, it may make sense to wait even longer, because you’ll receive a larger monthly benefit – even more than your full benefit. Every month past your full retirement that you delay, Social Security will increase your check by about 0.7 percent per month.

If your full retirement age is 66, then here’s how much your check would increase

Retirement age New benefit (percentage of full benefit) A $1,000 check becomes 66 + 6 months 104 percent $1,040 67 108 percent $1,080 67 + 6 months 112 percent $1,120 68 116 percent $1,160 68 + 6 months 120 percent $1,200 69 124 percent $1,240 69 + 6 months 128 percent $1,280 70 132 percent $1,320

Source: Social Security Administration

So if your full retirement age is 66, then if you can wait two more years and claim benefits at age 68, you’ll increase your monthly check by 16 percent. In this case, if your full benefit were $1,000 a month, your new benefit would become $1,160 per month. And you’ll still receive cost of living adjustments on top of this amount, typically raising your payout a little each year.

Workers have other ways to grow their Social Security benefits, too, but start early.

What you need to consider before filing

A larger benefit check sounds great, but there are tradeoffs, and soon-to-retire folks should consider multiple issues before they decide one way or the other on when to file. If you really want to consider all the avenues, then you’ll have to think about your finances and longevity – two issues that people have a hard time grappling with.

But here’s the key tradeoff: you can file early and take a reduced benefit, expecting that a shorter lifespan will mean you receive more now, or you could file at full retirement age or later and claim a bigger check, and eventually live long enough to claim more than the first approach.

“Social Security is like longevity insurance,” says Brent Neiser, a certified financial planner and chair of the Consumer Advisory Board at the Consumer Financial Protection Bureau. “It’s a stream of payments that will not stop throughout your life, so delaying your benefits to keep those payments as large as possible forms a helpful base to your retirement plan.”

Neiser urges those who have not saved enough for retirement to use whatever means possible to postpone their Social Security benefits until after their full retirement age to help boost their future income.

“You can use personal savings to help bridge the gap, but ideally you should plan to work a little longer (and delay Social Security),” Neiser says.

Check out Bankrate’s retirement income calculator to figure out how much monthly income your savings will provide you. Then Bankrate’s Social Security calculator can help you estimate your benefits.

Watch out for hidden costs

You’ll also want to consider other lifestyle factors, especially Medicare. Americans become eligible for federal health insurance coverage at age 65, well after when you can begin to file for Social Security.

“If you stop working at age 62 and lose health insurance, you have to get supplemental insurance to bridge the gap until you turn 65 and Medicare kicks in,” Neiser says.

If you work during retirement, you have another incentive to delay collecting Social Security. Earning too much at a job after you begin collecting your benefit can reduce your payout, but only if you have yet to hit full retirement age.

However, when you hit full retirement age, your benefit will increase to account for any benefit that was withheld earlier due to working. Here’s how much you can earn and not get hit.

If you’re younger than full retirement age for all of 2020, the Social Security Administration will deduct $1 of your monthly check for every $2 you earn above $18,240 per year.

If you reach full retirement age in 2020, the administration deducts $1 of your monthly check for every $3 you earn above $48,600 until the month you reach retirement age.

You’ll also owe Social Security and Medicare tax on your earnings, even if you’re already receiving benefits.

So those are some potential pitfalls to claiming Social Security early.

Early benefits can still pay off

However, taking early benefits can still pay off despite the reduced monthly check. But you’ll want to be sure you budget for a reduced benefit.

“No one can predict how long you’ll live, but if you’re facing a potentially significant reduction in life expectancy and are short of income, taking Social Security early may be appropriate,” says Neiser.

Married women are also good candidates for claiming early benefits because they are likely to outlive their husbands. Those widows then become eligible to receive the greater of either their benefit or their late husband’s benefit.

However, this scenario works only if the husband does not claim his benefits early. By not claiming early benefits, the husband effectively increases the monthly benefit his wife eventually receives. So you’ll want to calculate how filing early will affect your spousal benefit here.

What’s your break-even?

If you’re looking to maximize your total lifetime Social Security payout, you’ll want to conduct a break-even analysis to determine when you should start drawing your benefits.

Your break-even age occurs when the total value of higher benefits (from postponing retirement) starts to exceed the total value of lower benefits (from choosing early retirement).

For example, if you are eligible to collect a reduced $900 benefit at age 62 plus 1 month, and your benefit would increase to $1,251 at age 65 and 10 months, your estimated break-even age is 75 years and 5 months.

If you expect to live beyond that age, it could make financial sense to delay drawing benefits. The Social Security Administration’s life expectancy calculator can help you decide.

When it comes to calculating a start date for Social Security benefits, however, there’s not an age that’s appropriate for everyone. Consider your own financial need, health and other retirement plans before making the call. If you can’t reasonably afford to live without taking benefits, it may make little sense to delay taking your benefit.

Bottom line

Choosing when to take Social Security can be a tough decision, because you won’t have some of the key information – like how long you’ll live – to make the optimum choice. But if you expect to live until a ripe old age and you otherwise have your own financial resources, it can make a lot of sense to delay taking your monthly benefit and pile up a larger paycheck while you wait.

Featured image by Taiyou Nomachi of Getty Images.

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