SALT LAKE CITY — Most older Americans begin taking Social Security benefits before they reach what the Social Security Administration defines as full retirement age. By doing so, these people might be depriving themselves of significantly larger benefit payments.

According to information from the U.S. General Accountability Office, only 8 percent of men and 7 percent of women wait until age 67 to file for Social Security benefits. In fact, the most common age for filing is 62 — with almost half claiming benefits in the first month of eligibility.

The Social Security Administration states, "If you start your benefits early, they will be reduced based on the number of months you receive benefits before you reach your full retirement age.”

For someone whose full retirement age is 66, at age 62 the reduction in benefits is 25 percent. That means someone entitled to a monthly benefit of $2,000 at full retirement age would receive $1,500 if he or she took the benefit at 62.

If the person claiming benefits at 62 continues working, there can be significant penalties. For 2014, the Social Security Administration limits an early retiree's earnings to $15,480 ($1,290 per month). For those whose income exceeds that amount, benefits are reduced by $1 for every $2 earned over the limit. There are no restrictions on earned income after full retirement age.

In contrast, there are incentives for retirees who delay taking their benefits. As socialsecuritychoices.com explains, “Waiting past age 62 to claim your benefits seems costly: you forgo cash in hand. But waiting also offers a substantial advantage: each year you delay claiming, your benefits increase for the rest of your life. And, those benefits are inflation protected.”

Currently the Social Security Administration offers a 5 percent to 8 percent increase (depending on birth year) in annual benefits for each year a person delays benefits after reaching full retirement age for up to four years.

That means a person who reaches full retirement at 66 can receive a 32 percent larger benefit if he or she delays claiming that benefit until age 70. If that person’s retirement benefit at 66 is $2,000 monthly, he could instead receive monthly payouts of $2,640. That is 76 percent more than what the same person would receive if payouts began at 62.

According to Kiplinger’s Retirement Report, it makes financial sense for retirees to spend IRA and 401K funds at the beginning of retirement and delay tapping Social Security benefits until age 70. In addition to offering higher monthly Social Security payments, this can help lower tax liability as well. While IRA withdrawals are taxed as ordinary income, Social Security benefits are taxed at a reduced rate.

Benefit selection can impact others as well

Another factor many retirees fail to consider is that when and how they choose to claim benefits can impact benefits for other family members such as spouse and survivor benefits. The Social Security Administration defines the retired worker as “the primary beneficiary, because it is upon his/her primary insurance amount that all dependent and survivor benefits are based.”

Related:

Why couples should plan for Social Security's death reduction

Even after they are retired and collecting Social Security, most married couples never plan for the loss of income that occurs when one of them dies and one of the two Social Security benefits they have been receiving disappears.

When someone retires and takes an early reduced Social Security benefit, that decision — in turn — reduces the benefits to which a spouse or dependent child might be entitled. For example, someone whose full retirement age is 66 would receive a 25 percent reduction if benefits began at 62. However, the reduction of the accompanying spousal benefit would be 30 percent, according to the Social Security Administration.

To better illustrate, imagine that at full retirement age of 66 a primary beneficiary’s monthly benefit amount would be $2,000. The accompanying spousal benefit would be $1,000. So the combined household benefit would total $3,000.

If that same couple were to instead begin taking benefits when the primary beneficiary were 62, the primary beneficiary’s monthly payment would be $1,500, the spousal benefit would be $700 and the combined household benefit would be $2,200.

In this case, if the primary beneficiary were to die after opting for that early benefit, the surviving spouse would receive the $1,500 monthly benefit. If, however, the primary beneficiary waited until 70 to begin taking benefits and then died, the surviving spouse would receive $2,640 monthly instead of $1,500.

In other words, by waiting until 70 to take a Social Security benefit (instead of at 62), the primary beneficiary ensures that the surviving spouse’s benefit would be $2,640 instead of $1,500. That is an increase of 76 percent.

Another way to view it is that by waiting until age 70, the monthly benefit of $2,640 for the primary beneficiary is 20 percent more than the combined household benefit of $2,200 available for a couple who opt for early retirement.

Just because the primary beneficiary waits until 70 to take benefits does not mean Social Security benefits are not available until then. Once the primary beneficiary reaches full retirement age (66 for this example) his or her spouse can begin taking a spousal benefit that is up to 50 percent of the amount of the primary beneficiary’s primary insurance amount.

The Social Security Administration advises, “You should make an informed decision about when to apply for benefits based on your individual and family circumstances.”

In order to do that, one should weigh all options carefully and perhaps consult with a qualified adviser about the best time and strategy for claiming benefits.

Flint Stephens has a master's degree in communications from Brigham Young University. He is a licensed investment adviser for Strategis Financial Group Inc. in Provo.

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