Ask just about any retiree and they’ll tell you how much they love their monthly Social Security checks.
It’s an incredibly important source of retirement income, with over 66 percent of beneficiaries either critically or totally dependent on Social Security to maintain their quality of life. With so much at stake, it’s important to fully understand the benefit statements that you receive in the mail—and why what you’re seeing on paper is most likely wrong!
Here’s how it works:
Once you reach age 60, you will receive a benefit statement from the Social Security administration each year until you claim your benefits. Your statement will show three benefit amounts, at age 62, age 66 or Full Retirement Age, and age 70. Age 62 is the earliest you can claim benefits, but will pay you the smallest benefit amount for the rest of your life. Claiming at age 66 (Full Retirement Age for most current retirees) will pay you a benefit amount that is 33 percent larger than your age 62 benefit. Claiming at age 70 will pay you the largest benefit, which is also 76 percent larger than the benefit you would receive at age 62. Here what it could look like:
- Age 62: $1,200 monthly benefit
- Age 66: $1,600 monthly benefit
- Age 70: $2,112 monthly benefit
However, the numbers on your statement may be much lower than the amount you will actually receive in your checks. Yes, you may get more money than you’re check shows. How? Every year, Social Security benefits receive a Cost of Living Adjustment (COLA). The COLA is an incredible feature that increases Social Security benefits over time to help retirees keep up with the rising cost of goods. Even modest annual COLAs of 1.5 percent – 2.5 percent could result in a substantial increase, especially when applied over time. However, the reason why your check will be higher is because Social Security statements do not take into account the impact that COLAs will have on your benefit amount if you delay claiming. If you delay, you will still receive credit for COLAs from previous years, or what I call “Retro-active COLA Credits.”
For instance, if you delayed claiming your benefits until age 70, you would receive eight years of Retro-active COLA credits. This could substantially increase the size of your benefit at age 70. If you delayed claiming until age 66 you would receive four years of Retro-active COLA Credits, also increasing your benefit amount.
So, as an example, consider that at age 62 your Social Security statement shows that by delaying to age 70 your monthly benefit will be $2,112. A 2 percent average annual COLA increase during the next eight years would mean that your monthly benefit would actually be $2,475. That’s $363 extra dollars per month, and an extra $4,356 per year!
With Retro-active COLA Credits the case to delay claiming your benefits becomes even stronger. Delaying increases your benefit and it doesn’t cause you to miss out on any COLA increases. Before claiming, you should consider the impact that Retro-active COLA credits will have on the size of your benefit.
Brian Doherty is a Social Security expert and author of the award-winning book, Getting Paid to Wait: Bigger Social Security Benefits – The Simple and Easy Way (Acanthus Publishing, 2015).