When working, every year you receive some kind of pay raise. And typically, you would want that pay raise to be as big as possible. In this situation, would you ask your boss to receive the smallest raise possible? No, nobody would ask for that. But that is exactly what you would be doing if you claim your Social Security benefits at age 62. You would be asking to receive the smallest raise, or increase, in your Social Security benefit every year for the rest of your life.
Getting the smallest raise or the biggest raise in your benefits every year depends on the age you claim. If you claim at age 62, you will lock into receiving the smallest increase in your Social Security benefit every year for the rest of your life. If you claim at age 70, you will lock into receiving the biggest increase for life. In fact, every year you delay claiming past 62, will result in a bigger pay raise or increase.
I am going to use this chart to illustrate how this works. With this chart, I am going to compare the difference between claiming at age 62 or claiming at age 70. Let’s assume that these are your benefit amounts.
On your Social Security benefit statement, it says if you claim your benefit at age 62, they will pay you a monthly benefit of $1,875 per month. But if you were to wait and claim your benefit at age 70, Social Security will increase your monthly benefit up to $3,300. At the bottom of the middle column, the “Monthly Income” column, the number $1,425 is circled. That is the initial difference between the two monthly benefit amounts. You will receive $1,425 more per month if you claim at age 70 compared to claiming at age 62.
Now look at the last column on the right, the “20 Years Later” column. This column shows the increase in those monthly benefit amounts 20 years later if we assume an annual COLA increase of 3.0%. So every year, over that 20 year period of time, your monthly benefit would increase by 3.0%. I used an annual COLA increase of 3.0% because that is the approximate 75-year average for inflation.
If you claim at age 62, 20 years later your monthly benefit of $1,875 has grown to $3,386. If you claim at age 70, 20 years later your monthly benefit of $3,300 has grown to $5,959. The difference 20 years later has also grown to $2,573 per month. You would make $2,573 more per month, if you claim at age 70 as opposed to claiming at age 62. If we multiple that monthly difference by 12, the result is $30,876 for the year. In this case, 20 years later, you would be making $30,876 more per year if you claimed your benefits at age 70 opposed to claiming them at age 62.
Apply the Percentage to a Bigger Benefit Amount
Here is the powerful concept, everybody gets the same COLA percentage increase, it does not matter when you claim your benefits, BUT, and this is a big BUT, if you apply that same percentage to a bigger benefit amount, it results in bigger dollar increases every year for the rest of your life. If you live longer than 20 years in retirement, say 25 or 30 years, the monthly difference in those two benefit amounts would grow even larger. Apply the same annual COLA percentage increase to a bigger benefit and get bigger pay raises every year for the rest of your life. How do you increase the size of your benefit so you can apply the annual COLA to that bigger benefit? You delay claiming it as long as possible.
If you want to get the biggest pay raise in your Social Security benefit for the rest of your life, then delay claiming your benefit as long as possible, ideally until age 70. If you want the smallest pay raise in your Social Security benefit every year, then claim at age 62. Locking into the smallest pay raise every year is a powerful reason not to claim your benefit at age 62.
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