Delaying Benefits Might Actually Cause You to Lose Out on Social Security Income

Your goal in filing for Social Security should be to secure the highest payout possible. The age at which you claim benefits will greatly factor into that outcome.

You're allowed to file for Social Security as early as age 62, but if you want the full monthly benefit your earnings record entitles you to, you'll need to wait until full retirement age, or FRA, to file. That age is based on your year of birth, and is either 66, 67, or somewhere between the two. Filing before FRA will reduce your benefits on a monthly basis, and the largest possible reduction you'll face is 30% if you file at 62 with an FRA of 67.

There's also the option to delay benefits past FRA. For each year you hold off, you'll rack up delayed retirement credits that boost your benefits by 8%. Those credits, however, stop accruing once you turn 70, which is why that's considered the latest age to claim Social Security. Though you certainly won't be forced to file at that point, there's also no financial incentive to wait.

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Now you'll often hear that to get the most money out of Social Security, you'll need to delay your benefits all the way until 70. And that's good advice when we talk about increasing benefits on a monthly basis. But your goal should actually be to increase your benefits on a lifetime basis, and if your health is poor, filing at 70 could cause you to do the very opposite -- lose out on income that could've been yours.

Claiming benefits at 70 might backfire on you

Interestingly enough, Social Security is designed to pay you the same total lifetime benefit regardless of the age you file at. The logic is that any reduction in benefits you face by filing early will be offset by the larger number of monthly payments you collect, and vice versa -- you'll get more money on a monthly basis by waiting until 70 to file, but you'll also collect fewer payments. This break-even theory, however, assumes that you'll live an average lifespan. If you pass away at a relatively young age, then delaying benefits could actually end up hurting you in a very big way.

Here's how that scenario might play out. Imagine you're entitled to a monthly benefit of $2,000 at an FRA of 67. Waiting until age 70 to file for Social Security will increase each monthly payment you get to $2,480. However, you'll collect 36 fewer payments than you'd get by claiming benefits at FRA. If you live until age 82-1/2, you'll break even with a lifetime total of $372,000, regardless of whether you file at 67 versus 70. But if you file at age 70 and pass away sooner than 82-1/2, you'll end up losing out on lifetime income despite having boosted your benefits on a monthly basis.

Case in point: If you were to file for benefits at 67 and pass away at 76, you'd wind up with $216,000 in total Social Security income. But if you were to file at 70 and pass away at 76, you'd collect just $178,560 -- more than $37,000 less.

And that's why delaying benefits isn't always a good idea. If your health is strong and you have a family history of longevity, then you might play the odds and hold off on taking benefits as long as possible. But if your health is iffy, and you don't have the best family health history, then it generally pays to claim benefits sooner, as doing so could give you more lifetime income.

Of course, without a crystal ball, it's impossible to predict how long you'll live. The best you can do, therefore, is use your health going into retirement as an indicator. If it's great, then there's no reason to assume it won't stay that way. But if you have any reason to believe you won't live as long as the average senior, then waiting on Social Security could be the biggest financial mistake you'll ever make.

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