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Why Late Retirees Will Soon Get Smaller Social Security Bonuses

Dan Caplinger, The Motley Fool

One common piece of advice on Social Security is that if you want to get larger monthly payments, it pays to wait. Many older Americans take Social Security at their earliest opportunity when they turn 62, and that results in a big pay cut compared to what they'd get if they waited until full retirement age.

For retirement benefits, Social Security goes a step further, paying a bonus to those who wait beyond their full retirement age to take benefits. This bonus comes in the form of delayed retirement credits . Yet slowly but surely, the maximum amount of delayed retirement credits that new retirees are entitled to take is dropping -- and some expect further reductions in the years to come.

Three Social Security cards with a brass key on top.

Image source: Getty Images.

The basics of Social Security's bonus for retiring late

The amount of monthly retirement benefits that workers get varies depending on their age when they retire. The calculations that the Social Security Administration provides for determining the exact benefit amount are based on a single fundamental principle: payments should work out to be roughly the same regardless of when you claim them as long as you live to a normal life expectancy.

There's plenty of complex actuarial science that goes into the rules, but actually using the rules isn't too hard. It basically boils down to three things:

For those looking to retire late, the bonus that Social Security gives you is two-thirds of a percent of your baseline retirement benefit amount for every month that you wait beyond full retirement age. Your delayed retirement credits max out when you reach age 70.

To help illustrate this, say that you just turned 66 in early 2019 and are thinking about retiring. Your Social Security statement says your regular benefit would be $1,800 per month, but you're thinking about putting off getting your benefits for a couple of years until you turn 68.

For someone born in 1953 who turns 66 in 2019, full retirement age is 66. If you're planning to wait two years, that works out to 24 months. 24 months multiplied by two-thirds of a percent works out to 16%, so your bonus amount will be 16% of $1,800, or $288 per month. That amount is valued in today's dollars, and it'll be subject to the same upward adjustments for inflation as your benefits would be if you took them now.

Why younger workers will see less of a bonus for waiting

In the example above, the worker chose to wait 24 months. But because the worker's full retirement age was 66 and you can earn delayed retirement credits up to age 70, it would've been possible to wait as long as 48 months -- getting a 32% bonus.

However, full retirement ages are going up for younger workers. If you were born in 1955, then your full retirement age is 66 and two months. For those born later than that, the age goes up by two months until it hits 67 for those born in 1960 or later.

Because delayed retirement credits always max out at 70, a higher full retirement age means a smaller bonus for waiting. For someone whose full retirement age is 67, waiting until age 68 to retire would get you only 12 months' worth of delayed retirement credits, working out to an 8% bonus. That's $144 per month less than in the example above. Moreover, the most you could ever get would be a 24% bonus if you waited until age 70 to claim.

What it means for you

Keep in mind that you only get a bonus for waiting beyond full retirement age if you're claiming your own retirement benefits. Spousal benefits don't get a bonus, so it rarely makes sense to wait any longer than full retirement age to get them.

The fact that fewer delayed retirement credits will be available for those whose full retirement age is higher doesn't change the general principle that waiting results in more money. Indeed, if you retire at 66 when your full retirement age is 67, you'll suffer a penalty compared to your full benefit.

When you claim Social Security is a personal decision, but there are many financial aspects to it. Understanding not only the current bonus that late retirees get for waiting but also the impact on future retirees is crucial so that you can make the best choice for your situation.

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