Delaying Social Security Boosts the Value of COLAs

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Trying to decide when to claim your Social Security benefit? Here's an added incentive for delaying: Cost-of-living adjustments (COLAs) start pumping up your benefit at age 62, even if you don't claim your benefit until much later.

You probably already know that you'll take a permanent cut if you claim benefits before your full retirement age (66 if you're born between 1943 and 1954). And you'll get an 8% credit for each year you delay from full retirement age to age 70. That means someone due a full benefit of $2,000 will get $1,500 if she claims at 62 and $2,640 if she holds off until 70.

And if there's any inflation between the time when you become eligible at age 62 and age 66, your full benefit will be more than the $2,000 in this example. Here's an illustration from William Reichenstein, principal of consulting firm Social Security Solutions, based on these benefits and an assumption of annual 3% compounded COLAs.

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Assume the beneficiary claims at 62. At 66, her monthly benefit would climb to $1,688, thanks to four years of compounding adjustments. At age 70, four more COLAs would push the benefit to $1,900.

What happens if this person waits until age 66 to claim benefits? Her first check would be for $2,251 rather than $2,000, thanks to the four years of 3% COLAs that began compounding at age 62. The adjustments would be calculated on the full $2,000 benefit.

If the beneficiary delays past 66, she also gets a delayed retirement credit of 8%, which is applied to the COLA-adjusted benefit. For example, if she claims at 67, she would get $2,318, which includes five years of COLAs on her full benefit -- plus an 8% delayed retirement credit on the $2,318. That boosts her benefit to $2,503. (Delayed retirement credits don't compound.)

Assuming she delays until 70, she gets eight years of compounded COLAs based on her full $2,000 benefit -- bringing it to $2,533. And she would get four years of delayed credits calculated on the $2,533. Adding 32% ($810) to that amount would bring her monthly benefit at age 70 to $3,343.

Susan Garland is the former editor of Kiplinger's Retirement Report, a personal finance publication whose subscribers are retirees and those approaching retirement. Before joining Kiplinger in 2006, Garland was a freelance writer whose work appeared in the New York Times, the Washington Post, BusinessWeek, Modern Maturity (now AARP The Magazine), Fortune Small Business and other publications. For 12 years, Garland was a Washington-based correspondent for BusinessWeek, covering the White House, national politics, social policy and legal affairs. Garland is a graduate of Colgate University.