How Much Does Delaying Filing Affect My Social Security Benefit?

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Recent email contains the following excerpt:

I am approaching the Social Security eligibility age of 62. According to what I’ve heard, my benefit will be reduced the most if I file at age 62, while it will increase by 8 percent per year if I wait to file.

Is this accurate?

To the reader,

You are partially correct and on the right track with the rest of your statement; however, you are slightly off with the amounts.

It is true that if you apply for Social Security at age 62, your benefit amount will be reduced to the minimum amount. It is also true that your benefit will increase by 8 percent per year for each year that you delay receiving it, though this is not always the case.

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To better comprehend the year-over-year increases, we must review the rules regarding the reductions for early filing. For the 36 months closest to your Full Retirement Age (67 for those born in 1960 or later, a bit less for those born earlier), the monthly reduction is 5/9 of 1 percent. Therefore, if you file exactly 36 months (3 years) before your Full Retirement Age (FRA), your benefit will be reduced by 20%. This result is obtained by multiplying 5/9 by 36 (180/9 = 20).

The reduction is calculated as 5/12 of 1 percent per month for any months exceeding 36 before your FRA. This effectively results in a 5% reduction in benefits for each 12-month period that occurs more than three years prior to your FRA.

The maximum reduction in benefits occurs when you apply for Social Security benefits at the earliest age of eligibility, which is 62. If your FRA is 67, you are 60 months (five years) away from your FRA at age 62. Therefore, we know that there will be a 20% reduction (since it’s over 36 months) plus the additional months over 36. 24 months is equal to 60 months minus 36 months. The discount for this additional 24 months is 10%, as 24 times 5/12 percent equals 10% (120/12 = 10)

The majority of employees have faith in Social Security; should you?

After FRA, there is a second type of increase known as a Delayed Retirement Credit. This credit is 2/3 percent per month, for an annual total of 8 percent. (This is where the 8 percent increase for each year of delay originates, but it doesn’t quite work out as expected. Continue.)

To determine by how much your benefit will increase for each year of delay (beginning at age 62), we must calculate and compare the benefit amounts at each age level.

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The actual year-over-year increase ranges from as low as 6.67 percent to as high as 8.33 percent — it is not always 8 percent. In actuality, there is only one year-over-year period in which the increase is exactly 8 percent, and that is the year following your FRA, despite the fact that 8 percent is frequently cited (because it is the amount used to calculate DRCs). This is due to the fact that increases in the DRC are not compounded, but rather accumulative. The 8 percent delay credit for each year is simply added to the 8 percent credit from the previous year, so two years of delay equals 16 percent, three years equals 24 percent, etc.

Due to the accumulative nature of the increase, the year-over-year growth rate is less than 8 percent in each succeeding year.

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