What Are Delayed Retirement Credits?

Good things, they say, come to those who wait. And that may be especially true for someone who is eligible to receive Social Security income in their later years.

When you apply for benefits after you reach what is considered your full retirement age for Social Security, the program applies delayed retirement credits to your monthly payment. That means you receive a larger amount for the rest of your life. Note that age 70 is the cut off.

Does that mean holding off on benefits is the right move for every retiree? Not necessarily. The timing of your application depends on individual circumstances — as well as your confidence in the program's long-term solvency.

What to Know About Delayed Retirement Credits

When you file for Social Security, your retirement benefit is based on the amount of earned income you received throughout your years in the workforce. Based on your average annual earnings, the program determines a monthly benefit amount that you'll receive at your full retirement age.

If you were born between 1943 and 1954, your full retirement age is 66. But it gradually increases for those born after that. For those born in 1960 or later, you can receive your full retirement benefits at age 67.

You don't have to apply for benefits at your full retirement age, though. You can start to collect Social Security income as early as age 62, but you'll receive a smaller monthly amount when you do. This accounts for the fact that you are expected to receive benefits for a longer time than someone who waits to file.

The amount of that reduction depends on how early you apply. For example, if you start receiving benefits 36 months ahead of your full retirement age, you'd receive 20% less each month than you otherwise would.¹ And if you collect 60 months early — the maximum length of time possible — you'd get 30% less.

However, the opposite is also true: If you wait until after your full retirement age to collect, you'll receive a larger amount each month. You'll receive fewer payments over your lifetime, so the program compensates you with a larger payout.

The Social Security Administration (SSA) does this by issuing delayed retirement credits for every month you hold off beyond your full retirement age — up to age 70. Postponing benefits isn't without risk, of course. If you pass away shortly after receiving benefits, for example, you will have received a smaller total amount than if you had started collecting earlier.

But if you live a longer-than-average life, you'll receive a larger amount in total. The fact that you'd be receiving fewer monthly payments over your lifetime would be outweighed by the larger amount of those benefits.

How Delayed Retirement Credits Are Calculated

To understand how delayed retirement credits work, it's important to have a basic knowledge of how Social Security calculates your retirement benefit. It's complicated, but the program essentially uses your annual earnings from up to 35 years when you were in the workforce.

It doesn't simply take the actual dollar amount you earned in those years. It applies a process called indexing.² This accounts for changes in your compensation over time. So if you earned progressively more money throughout your career, which is typical, that's reflected in your future benefits. Using a formula, it arrives at a primary insurance amount (PIA) that you'd get if you applied for benefits at your full retirement age.

As noted, when you collect benefits early, you'll actually receive a smaller amount each month than your PIA. Depending on how early you apply, you could get up to 30% less than you otherwise would. If you retire later than your normal retirement age, Social Security adds delayed retirement credits to your PIA, so you're actually getting more each month.

Credits Depend on Your Age

Those credits are applied each month that you delay benefits and vary based on your age. For example, if you were born from 1933 to 1934, you would have received a monthly increase of 11/24 of 1% for every month you held off after reaching your full retirement age.³ That amounts to 5.5% each year.

The credits increase incrementally for younger recipients. For instance, if your year of birth was 1939 or 1940, your annualized credit would be 7%. For anyone born in 1943 or after, the annualized credits would increase your monthly benefit by 8%. Delayed retirement credits stop at age 70, so there's no added incentive to keep postponing benefits beyond that milestone.

If you retire before age 70, some of your credits may not count toward your benefit until the year after you begin collecting benefits. Take, for instance, a retiree whose full retirement age for Social Security is 67 but who waits to apply for benefits until they turn 69. Their initial benefit would reflect any delayed retirement credits that have accumulated between age 67 and the year before their 69th birthday. The following January, the monthly benefit would start to reflect any credits obtained in the year they reached age 69.

While the calculation of benefits may seem complicated, the SSA offers an online calculator that can simplify things.⁴ It allows you to estimate the effect of your credits based on your age and the date when you expect to receive benefits for the first time. There are also benefit calculators where you can add salary details, or you can create a My Social Security account on the program's website, which provides estimated benefit amounts based on the age when you file.^5,6

Are Spousal Benefits Affected?

Because of delayed retirement credits, you can increase your own monthly benefit by holding off on Social Security up to age 70. However, postponing when you file doesn't increase your spouse's benefit, if it's based on your earnings record (the maximum spouses can receive is 50% of your PIA).

Postponing benefits also doesn't affect the maximum family benefit, which is the limit on how much you and your immediate family members can receive in total based on your career earnings. The family maximum is based on what you would receive at your full retirement age, so when you choose to apply for benefits won't factor in.

However, any delayed retirement credits you've accumulated do affect what your surviving spouse — or even your surviving divorced spouse — will receive when you pass on.⁷ The SSA computes their benefit based on your primary insured amount plus any delayed retirement credits you've obtained up to the month of your death.

The Impact of Delaying Your Benefits

Just how much difference does delaying your Social Security benefits make? The answer may surprise you.

Take, as an example, someone who was born on January 15, 1960. That means they would be eligible to receive their normal retirement amount in 2027. Let's further assume that they would collect $2,000 if they applied for benefits on their 67th birthday.

But suppose they choose to wait to apply until their 70th birthday — January 15, 2030 — instead. Because they were born after 1943, they would have delayed retirement credits that add 8% to their benefit each year. So their initial monthly amount from Social Security is 24% larger — $2,480 a month — because they waited three extra years.

If this individual happens to pass away during the first few years of reaching age 67, they would have been better off collecting benefits sooner. After all, they're receiving three years of additional benefits this way.

But by the time they reach age 82½, that advantage disappears because of the larger payout from maximizing delayed retirement credits. Every month thereafter, their lifetime payments from Social Security are higher because they waited. By their 90th birthday, if they reach it, they would have received $43,200 more in total (pre-tax) than if they have collected at normal retirement age.

Should You Delay Your Benefits?

Holding off on your retirement filing has a number of advantages, not least of which is the larger monthly check you'll eventually receive from the government. Delaying your application also provides tax diversification, enabling you to draw down your fully taxable assets while you wait to receive your Social Security income.

According to the Journal of Accountancy, tapping pretax 401(k) and individual retirement account (IRA) funds in your 60s can help reduce your required minimum distributions in subsequent years. You can then pivot to lower-tax Social Security benefits in your 70s (only 85% of which is taxable even at the highest income levels).⁸

But that doesn't mean delaying benefits is the right move for every retiree. You may choose to take Social Security at your full retirement age or earlier for several reasons. These include:

• Preventing debt. If you're afraid of pulling too much out of your investment accounts while waiting to claim benefits, you might feel safer filing for Social Security sooner than later. Likewise, if you're on a tight budget, applying for benefits earlier may prevent you from having to take out loans that can lead to additional financial stress.
• Health issues. It can take 12 to 14 years to reach the break-even point on delaying Social Security, where the larger monthly benefit starts to make up for the fact that you're receiving fewer of them during your lifetime. If you have a serious medical issue or a family history of premature deaths, you may never reach the age where holding off is the better strategy.
• Concerns about Social Security's future. The solvency of the Social Security program is, of course, a perennial issue. According to a 2022 report by the SSA, its trust fund reserves are projected to run out by 2035 without changes to the program's funding or benefit amounts.⁹ If you're skittish about the program's future, you might consider claiming benefits sooner than later.

Fortunately, holding off on your application for retirement benefits isn't a one-time decision. Once your reach the age of eligibility — that is, you're 62 or older — you can file at any time. If you choose to wait until later to claim Social Security, though, you'll likely want to file for Medicare at age 65. According to the SSA, waiting longer to apply for Medicare could result in delayed coverage and higher costs.

Developing a Retirement Plan

The decision to claim benefits at your full retirement age or later can have important implications for your financial security in retirement. It's important to make that choice in the context of an overall retirement strategy that likely includes other sources of income as well.

Among the factors you'll want to consider is the tax treatment of these different sources to ensure that you're retaining as much of your assets as possible. If you need assistance, a qualified financial professional can help you understand the pros and cons of delaying your claim and help create a retirement plan that best meets your needs.

Sources

1. Benefit reduction for early retirement. https://www.ssa.gov/oact/quickcalc/earlyretire.html.
2. Social Security benefits amounts. https://www.ssa.gov/oact/cola/Benefits.html.
3. Delayed retirement credits. https://www.ssa.gov/benefits/retirement/planner/delayret.html.
4. Early or Late Retirement? https://www.ssa.gov/OACT/quickcalc/early_late.html#calculator.
5. Benefit Calculators - Estimate Your Benefit. https://www.ssa.gov/OACT/anypia/index.html.
6. Get Your Social Security Statement. https://www.ssa.gov/myaccount/statement.html.
7. What are delayed retirement credits and how do they increase my old-age benefit amount? https://www.ssa.gov/OP_Home/cfr20/404/404-0313.htm.
8. The pros and cons of delaying Social Security. https://www.journalofaccountancy.com/news/2022/mar/the-pros-cons-delaying-social-security.html.
9. 2022 OASDI trustees report — overview. https://www.ssa.gov/OACT/TR/2022/II_A_highlights.html#.