The Added Benefits of Delayed Retirement

Want to get a double-digit increase in your Social Security benefits?

Work past normal retirement age.

The impact of a few extra years of work can be astounding, particularly for those who worked sporadically in their younger years.

That’s largely because Social Security compensates you for working past age 65 in two ways: It replaces earlier, lower-wage years with new wages in its computation of your “primary insurance amount,” which is the baseline for determining how much Social Security you’re due. And it gives you something called delayed retirement credits, which boost your monthly benefits by several percentage points for each full year you work past normal retirement age.

Exactly how much more do you get?

“That’s always tricky,” says Stephen C. Goss, deputy chief actuary for the Social Security Administration in Baltimore.

The answer varies because Social Security payments are based on several factors, including how many years you worked, how much you earned, the year you were born and when you retired.

Then, too, some people get comparatively more for delaying retirement simply because Social Security’s delayed retirement credits phase in. People born in 1924 got just a 3%-per-year boost to their monthly benefits for each year they delayed retirement past age 65, but those born in 1943 or later will get an 8% annual credit. (They’ll have to work comparatively longer, however, because “normal” retirement age is slowly climbing and will hit 67 by the time the last of the baby boomers officially become senior citizens.)

Still, to get an idea of the dollars-and-cents impact of postponing retirement, let’s consider some hypothetical 62-year-olds, Sarah and Tom Edwards.

Sarah and Tom got married right out of college. Tom got a good job and quickly rose through the corporate ranks. Sarah stayed home for more than a decade with the couple’s growing family.

At age 37, Sarah went back to work. But because she didn’t have as much experience and didn’t break into management, she earned just “average wages” throughout her 25-year working career. In 1999, that average wage amounted to $28,000, according to the Social Security Administration.

If she retired in 1999 at age 62, her monthly Social Security payments would amount to $657 per month. However, if she waited until 65 to retire, the payment would rise to $882, or 34% more. What if she worked an extra 10 years, retiring at age 75? Her monthly Social Security stipend would soar to $1,469--more than twice what she’d get if she retired at 62 and 67% more than if she retired at 65.

Why the huge difference? Two main reasons. First, Sarah had just 25 years of earnings to use in figuring her primary insurance amount. Since the Social Security calculation of your average wage relies on 35 years of wages, if you have just 25 to report, 10 years of zeros are added in. That depresses your average monthly wage for Social Security purposes and qualifies you for a comparatively smaller monthly benefit. However, if you are able to work after normal retirement age, those zero-earnings years begin to be replaced. With each additional year Sarah worked, one of her zero-earnings years was dropped from the calculation in favor of her current-year earnings, pushing her average wage up.

She also gets delayed retirement credits for each full year after 65 that she postpones claiming benefits. In Sarah’s case, that boosts her benefits by 6.5% a year, compounded annually. That helps push her monthly Social Security checks 52% higher--from $882 to $1,337--for working just five additional years between ages 65 and 70.

Delayed retirement credits stop when you turn 70, because at that point Social Security starts paying monthly benefits whether you’re working or not. Nonetheless, Sarah still benefits from all those additional working years because her primary insurance amount increases each year she earns a salary and is able to replace a zero-earnings or lower-earnings year in the calculation.

Her husband, Tom, has a vastly different situation. He started in an executive training program right out of college and was able to quickly climb the corporate ladder. That gave him 35 years of high wages for the Social Security calculation, even before he turned 62.

However, if he retired at 62 and began taking Social Security benefits, he would be hit with an early-retirement penalty that would cost him about 20% of his monthly benefit. In addition, because he was earning more at the end of his career than at the start, he would miss out on being able to replace lower-wage years with higher-wage years in the calculation of his primary benefit amount. The bottom line: If he works until 65, he gets 27.4% more: $1,517 per month versus $1,191 if he retires at age 62.

What if he works longer? He also scores delayed retirement credits, which would boost his monthly benefits by 6.5% per year. The dollars-and-cents impact: He’d get $2,118 per month if he delayed retirement until age 70. If he works to age 75, it rises to $2,263.

“Individuals are definitely advantaged by working longer,” Goss says. “It gives them more Social Security income for the rest of their lives. That gives them a definite lifestyle advantage, to say nothing of the fact that they had all those additional years of earnings and presumably were able to put something away.”

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Social Security Benefits:

Does Waiting Pay?

The answer depends on how long you live and how much you need the money. But generally, waiting to collect Social Security until you are age 70 is worth it, providing you live into your mid-80s. Here’s how benefits would vary by retirement age for two hypothetical individuals, Sarah and Tom Edwards. Tom earned high wages throughout his adult life; Sarah was an average earner who went to work at age 37 after raising her children. These figures assume that both Sarah and Tom turned 62 in 1999. The figures are in constant 1999 dollars.

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Retirement Tom’s monthly Sarah’s monthly age Year SS benefit SS benefit 62 1999 $1,191 $657 65 2002 1,517 882 70 2007 2,118 1,337 75 2012 2,263 1,469

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Source: Social Security Administration