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Delaying Social Security Boosts the Value of COLAs

Wait to take benefits until age 70 and you will get eight years of compounded cost-of-living adjustments on your full retirement age benefit.

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.

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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.

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.

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