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Delaying Social Security benefits pays off

(MoneyWatch) Social Security retirement benefits are based on lifetime earnings. The greater your lifetime earnings, the larger your benefits.

But the retirement benefits you collect depend on the age you begin to collect them. Generally, the earliest age you can access benefits is 62. However, they will be less than what you would receive if you decide to wait until full retirement age (FRA), at which point full benefits are paid. For those born before 1938, the FRA is age 65, gradually increased for individuals born after that and before1943. For those brought into the world from 1943 to 1954 (currently age 70 to age 59), the FRA is 66. And for those born after 1954, the FRA gradually increases -- for everyone born in 1960 or later, that age is 67.

Total lifetime benefits will not vary a great deal whether you retire at 62 or FRA. Still, there is a decision to be made for those pondering retirement: Claim reduced benefits at age 62, or wait until later to get a larger payout. If you elect to access benefits before FRA, your monthly payment will be permanently reduced; if you hold out until you reach full retirement age, you will receive the full amount. One thing to take into consideration when making a decision is the spousal benefit. If your spouse outlives you by many years, it is advisable that the older party delay claiming Social Security benefits so as to avoid a reduction in monthly payments

Holding out can pad your pocket

If you continue to work beyond your FRA, your benefits can be increased by adding years of earnings on which they are based and using a Delayed Retirement Credit, a percentage increase in retirement benefits for each year beyond FRA that you do not take them.

This credit can add up. If you were born in 1943, your benefits will increase by 8 percent annually for each year you do not access them beyond full retirement age. As the percentage of the delayed credit varies with date of birth, check with Social Security to determine how this will affect you.

Unless you are still receiving medical insurance benefits from a spouse or an employer, you should still consider signing up for Medicare at age 65, as the cost will rise if you delay your application. After age 70, additional Delayed Retirement Credits do not increase your benefits, so individuals should sign up that point to receive them.

Making the decision

To determine what is right for you, consider the three options:

1. Reduced benefits at age 62

2. Full/unreduced benefits at FRA

3. Increased benefits at delayed retirement (anytime after FRA and up to age 70)

Your life expectancy is an important factor in your choice. If you don't expect to reach average life expectancy, delaying access to benefits may result in reduced lifetime benefits. You should also consider your earned income and your income tax situation. Last, keep in mind that Social Security retirement benefits are subject to annual increases in cost of living.

If you are single and plan to extend your working life beyond FRA, the decision is generally straightforward. Most people in this situation should wait until their FRA or later to receive unreduced to increase their benefits.

If you are under age 65 and have earned income in 2013 that exceeds $15,120 a year, the decision to delay benefits until at least age 65 is even easier. Under these circumstances, claiming retirement benefits will generally trigger the so-called earnings penalty, under which one dollar of Social Security retirement benefits is withheld for every two dollars their earned income exceeds this limit. It rarely, if ever, makes sense to do this.

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