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Deferred Retirement Benefits

Deferred Retirement Benefits

When you begin collecting Social Security retirement benefits depends on your date of birth, which, in turn, determines your full retirement age (FRA). Full retirement age is also referred to as normal retirement age.

If you were born in or prior to 1937, your FRA is age 65. The FRA increases incrementally based on birth year after that. For example, if you were born between 1943 and 1954, your FRA is age 66, and if you were born after 1960, your FRA is age 67.

Why does full retirement age matter? Because your FRA is the moment when you become eligible to receive 100% of your monthly retirement benefits. When you turn 62-years-old, you have the option of collecting your benefits early, but that will result in substantial and permanent reductions in your monthly benefits payments going forward.

When you’ve reached FRA for your date of birth, you have the option to defer benefits up until age 70. For every year that you delay, you will receive an annual percentage increase, which is called a delayed retirement credit (DRC). For those born in 1943 or later, your benefits will increase annually by 8%. The increase ceases when you reach age 70, however, so there is no benefit to delaying past that point.

Delayed retirement credits came into existence in the early 1970s because there were penalties imposed on individuals who continued to work, despite their eligibility for retirement, because of the retirement earnings test. This test no longer applies to anyone who has reached FRA.

Although most sources encourage people to defer receiving retirement benefits, there are important considerations to make before doing so. The Social Security Administration (SSA) bases its entire retirement model on the average lifespan of the American retiree, which, according to the department, is age 84 for a man and age 86.5 for a woman. Here’s the logic: if you collect retirement benefits early, your monthly benefit checks will be lower, but you will receive more of them; in contrast, if you defer benefits, you will receive fewer monthly checks, but the ones you will receive will be in larger amounts.

The most compelling reason to collect benefits early is if you are in poor health and will likely not reach the average lifespan, or you do not have a family history of longevity. You should also consider taking retirement benefits earlier if you are in desperate need of the money. If you’ve received a diagnosis of an illness that is terminal, for example, there is no reason to delay collecting retirement benefits.

Similarly, there are compelling reasons to defer collecting retirement benefits. Maybe you just don’t feel like or want to retire yet. When you do decide to retire, the amount that you receive each month is determined by the top 35 years of indexed earnings. If you do not have 35 years of indexed work history, any non-working year counts as a 0 in the average; therefore, if you currently work in a high-paying job, staying at that job longer will increase the average of your earnings. You may also have other resources to support you until you collect retirement benefits, such as an IRA or 401(k).

Regardless of whether you decide to collect retirement benefits early, wait until you reach FRA, or defer them until age 70, make sure that you sign up for Medicare when you turn 65-years-old. Failure to do so could cause a delay in your Medicare coverage and end up costing you more money to enroll. And speak to a trusted financial advisor before you make a final decision.