Top 3 Reasons to Delay Social Security Payments

A silver haired couple using a laptop to consider their finances.

For generations, retirees relied on three primary sources of income: company pension plans, personal savings, and Social Security. With only 16% of Fortune 500 companies now offering pensions to new employees and the average savings for soon-to-be retirees at only $163,577, there is a heavy reliance on Social Security payouts to make ends meet in retirement.

How the Social Security Administration Calculates Benefits

In 2018, the average Social Security payment rose to $1,404 per month, for a total annual benefit of $16,848, just above the poverty level in most states. The Social Security Administration uses your average income over your highest 35 years on the job and the age you claim benefits to determine how much you will receive each month.

You may file for benefits any time between the age of 62 and 70. Waiting beyond 70 provides no additional financial benefit. At the full retirement age, you will receive 100% of qualified benefits, which is between the age of 66 and 67, based on the year you were born.

Benefits of Waiting to Collect Social Security

  1. Higher Payouts Due to Bonus Payments

    If you have underfunded retirement accounts, waiting until age 70 will give you between 24 and 32% higher monthly benefits than claiming at your full retirement age. It will increase your payout by as much as 75% compared to filing for benefits at the age of 62. You receive an 8% bonus on your payout for each year you wait. For a claimant receiving the average payment of $1,400 per month, you could increase annual income from $16,848 to over $21,000.

  2. Increase Your Benefit Through Higher Income

    The Social Security Administration considers 35 years of income. If you do not work at least 35 years, then the zeros average into the formula to create 35 years of income. Even part-time work for a few additional years can increase your average income and thus increase your benefit.

    In many cases, the last years of your career are also the highest earning years. Working longer at a higher pay could offset lower earning years due to full-time schooling, unemployment, or other factors in your work history.

  3. Improve the Balances in Your Nest Egg

    Working longer allows you to set aside additional funds into retirement accounts, requires you to fund fewer years in retirement, and gives you more time for account growth.

    After reaching 50, you can contribute more money to tax-free or tax-deferred accounts earmarked for retirement. Work sponsored accounts allow for an additional $6,000 per year and IRA account an extra $1,000 before reaching the maximum contribution limits.

    Life expectancy tables estimate that the average 65-year-old will live another 20 years, with a 25% chance of living beyond 90. Delaying Social Security benefits will not only increase your monthly payout, but will also reduce the number of years you must rely on savings to fund retirement.

    Compound growth is one of the most important factors in account growth. If you gain an average market return, you can increase your portfolio balance by an average of 9.5% annually. An account performing at the market average with a balance of $163,577 could potentially grow to $214,765 in three short years, without any additional funds added.

A delay in claiming Social Security benefits could leave you with a stronger financial position and higher income levels, which can improve your quality of life in retirement.