Weigh Taking Early Retirement Benefits Against Full Retirement Benefits
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People nearing retirement can implement a number of strategies to cover living expenses during their post-working years. Although retirement plans, such as 401s and IRAs, are part of a retirement strategy for many, Social Security benefits are the most common source of income among retirees. The benefit is a guaranteed amount that you can start receiving as early as age 62, or you can wait until 70 to receive the highest monthly payment.
Various factors impact how much Social Security income you get when you start claiming benefits. To determine the optimal age to start taking benefits, you need to calculate your Social Security breakeven age to ensure that you balance payments versus longevity.
How Social Security Is Calculated
To calculate your benefit amount, Social Security looks at your entire work record. Here is how the Social Security benefits formula works:
First, every years earnings are indexed for inflation, and then the 35 highest are considered when calculating your benefit.
If you dont have 35 years of earnings, zeros will be used for the remaining years.
Second, The 35 highest inflation-adjusted years are added together and averaged, to arrive at your lifetime average Social Security earnings.
This amount is divided by 12 to determine your Average Indexed Monthly Earnings .
Third, once your monthly average is determined, it is applied to this formula to determine your Primary Insurance Amount .
The PIA is the benefit a person would receive if he/she elects to begin receiving retirement benefits at his/her full retirement age.
At this age, the benefit is neither reduced for early retirement nor increased for delayed retirement.
The formula used to compute the PIA reflects changes in general wage levels, as measured by the national average wage index.
The Social Security Administration releases a table each year showing the dollar amounts that go into the PIA formula .
Do You Expect To Have Additional Sources Of Retirement Income Beyond Social Security
Continue saving in the coming years.
Social Security won’t replace all of your pre-retirement income. On average, Social Security replaces 40 percent of a worker’s income. That means your retirement savings, pension, 401, or Individual Retirement Account will need to fill the gap. Claiming at your full Social Security benefit age or later can minimize this gap and maximize your monthly benefit. If you claim before your full retirement age, your monthly benefit could be reduced by as much as 30 percent.Learn more about saving for retirement.
You have an opportunity to continue growing your money.
If you can, get the highest monthly Social Security benefit possible by claiming at your full Social Security benefit age or later. If you claim before your full retirement age, your monthly benefit could be permanently reduced by as much as 30 percent. Also, take advantage of catch-up contributions to your 401 or Individual Retirement Account . Lastly, avoid losing your retirement savings to unnecessary tax penalties. If you withdraw your 401 or IRA savings before age 59½, you will likely face an early withdrawal penalty.Learn more about how retirement savings grow.
It’s a perfect time to start saving.
It’s never too late to start saving!
There are many ways to plan for a secure retirement outside of Social Security.
It’s never too late to start saving!
A type of retirement savings account offered by employers to help their employees save for retirement.
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Can I Use The Calculator To Figure Out Social Security Disability Insurance And Supplemental Security Income
No. SSDI is aimed at people who cant work because they have a medical condition expected to last a year or more or result in death. Your SSDI benefits last only as long as you suffer from a significant medical impairment while not earning significant other income.
SSI is a separate program for people with little or no income or assets who are 65 or older, as well as for those of any age, including children, who are blind or who have disabilities. The maximum monthly SSI payment for 2022 is $841 for a single person and $1,261 for a couple. But some states add to that payment, and you may receive less than the maximum if you or your family has other income. Get more information about SSDI and SSI from the Social Security Administration.
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How Are Your Social Security Benefits Calculated
Social Security uses your highest 35 years of earnings, indexed to a national average wage index, to calculate your primary insurance amount If you have fewer than 35 years of earnings, each year with no earnings will be entered as zero. You can increase your Social Security benefit at any time by replacing a zero or low-income year with a higher-income year.
There is a maximum Social Security benefit amount you can receive, though it depends on the age you retire. For someone at full retirement age in 2022, the maximum monthly benefit is $3,345. For someone filing at age 70, the maximum monthly amount is $4,194. And for someone retiring early, at age 62, the maximum monthly benefit is $2,364.
To estimate your benefits, use the Social Securitys online Retirement Estimator.
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Myth #: You Must Claim Your Social Security Benefit At Age 62
Some people think you have to start claiming your Social Security benefits at age 62. That’s a myth: 62 is the earliest age you can claim your benefit, but it’s not the only age to do so.
Your base benefit is calculated according to your “full retirement age,” or FRA, and your FRA is determined by your date of birth. The Social Security Administration calculates your base Social Security benefit based on your average indexed monthly earnings during the 35 years in which you earned the most .
Tip: You’ll find your FRA at Social Security’s website, SSA.gov, or on a paper statement mailed to you by the SSA. If you were born in 1960 or later, your FRA is 67.
If you claim Social Security benefits any time before your FRA, you lock in a permanent reduction in monthly income. Claiming at 62 translates to a reduced monthly income of 30%, relative to your FRA monthly benefit . That means you may receive a lot less monthly retirement income, every year, for potentially several decades. A key consideration for when you claim Social Security benefits is maximizing your income for a retirement that could last longer than 30 years.
Wait until age 70 and lock in a “bonus”:
- Waiting to claim Social Security after age 62 comes with a bonus: roughly 8% additional monthly income per year for each year you delay claiming .
- If your FRA is 67, your monthly income would increase 24% by waiting from 67 to 70.
- If your FRA is 67, your monthly income would increase around 77% by waiting from 62 to 70.
Getting A Social Security Number For A New Baby
The easiest way to get a Social Security number for your child is at the hospital after they are born when you apply for your childs birth certificate. If you wait to apply for a number at a Social Security office, there may be delays while SSA verifies your childs birth certificate.
Your child will need their own Social Security number so you can:
- Claim your child as a dependent on your income tax return
- Open a bank account in their name
- Get medical coverage for them
- Apply for government services for them
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Benefit Reduction If Taken Before Full Retirement Age
When calculating benefits for early retirement, there are one or two calculations, depending on how early benefits are taken. Assuming a normal retirement age of 67, the age of 62 is the earliest year a person can receive benefits or 60 months early.
The benefit is reduced by 5/9 of 1% for each month before the normal retirement age , up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of 1% per month.
For example, let’s say that a person wants to retire at 62, leading to a 60-month reduction from the normal retirement age of 67. The first 36 months would be calculated as 36 months times 5/9 of 1% plus 24 months times 5/12 of 1%.
- First 36 months: 5/9 = .5555 * 1% = .005555 * 36 months = .19999 or 20%*
- Remaining 24 months: 5/12 = .416666 * 1% = .00416666 * 24 months = .0999 or 10%
- In other words, benefits would be reduced by 30% if taken at age 62.
*The results were rounded and multiplied by 100 to create a percentage.
What If You Are Low
For most people, Social Security benefits are calculated based on lifetime earnings.
In order to be eligible for Social Security retirement benefits, youll need to earn a total of 40 credits over the course of your working lifetime.
If you do not earn a lot of income during your working years, you may be eligible for the Special minimum payment.
The special minimum Social Security benefit is a minimum PIA that was created in 1972 to provide benefits to certain low-income workers.
Specifically, the special minimum benefit is designed for people who have lower lifetime earnings overall.
These benefits are calculated based on years of service, not earnings.
The goal is to offer a higher number to certain low-income participants than the traditional benefit formula would produce, resulting in bigger monthly checks.
Low-income workers must have at least 11 years of coverage to qualify.
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Adjust Your Primary Insurance Amount If You Claim Benefits Before Or After Full Retirement Age
All the above calculations determine the primary insurance amount if you claim benefits at full retirement age — but you may decide to claim benefits before or after FRA. You can claim benefits as early as age 62. But if you claim benefits before FRA, your benefits are decreased by:
- 5/9 of 1% per month for each month prior to FRA for the first 36 months
- 5/12 of 1% per month for each additional month if you claim more than 36 months before FRA
If you claim benefits after FRA, benefits are increased by 2/3 of 1% for each month you wait up until age 70.
The table below shows FRA depending on your birth year:
| If You Were Born in | Your FRA Is |
|---|
Table source: Social Security Administration.
Depending when your FRA is, you’d apply the benefits reduction or increase to your primary insurance amount. For example:
- If FRA is 67 and you claim benefits at 66, that’s 12 months early. Multiply the per month-reduction *.01) times 12 months to see that benefits are reduced by around 6.7%.
- If FRA is 66 and you claim benefits at 62, that’s 48 months early. Multiply the per month-reduction for the first 36-months *.01) times 36 months + the additional reduction of *.01) times 12 months. This gives you 0.20 + 0.05, which amounts to a 25% reduction in your primary insurance amount.
- If FRA is 67 and you claim benefits at 69, that’s 24 months late. Multiply the per-month increase *.01) times 24 months to see benefits are increased by 16%.
If You Stop Work Before You Start Receiving Benefits
If you stop work before you start receiving benefits and you have less than 35 years of earnings, your benefit amount is affected. We use a zero for each year without earnings when we calculate the amount of retirement benefits you are due. Years with no earnings reduces your retirement benefit amount.
Even if you have 35 years of earnings when you stopped working, some of those years may be low-earning years. When you file for retirement benefits, those years are averaged into your calculation, creating a lower benefit. However, if you had continued to work, your low earning years are replaced with your high earning years. Higher earnings increase your benefit amount.
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How Do They Determine What Day You Get Your Social Security Check
If the birthday is on the 1st through the 10th, you are paid on the second Wednesday of each month. If the birthday is on the 11th through the 20th, you are paid on the third Wednesday of the month. If the birthday is on the 21st through the 31st, you are paid on the fourth Wednesday of the month.
How do they figure your Social Security benefits?
There are four ways to figure out your Social Security benefits: Visit a Social Security office to get an estimate, create an account at the official Social Security website and use its calculators, let the SSA calculate your benefits for you, or calculate your benefits yourself.
Are Social Security checks late?
Your payment might be late for a number of reasons, such as: You changed your bank or had a change of address and did not notify the SSA. If the SSA office that is responsible for processing your payment has a slower process, it may take longer for you to receive your check.
What Is The Future Of Social Security
As of June 2022, the Social Security Trust Fund is projected to have enough resources to cover all promised benefits until 2035 when, absent a change from Congress, benefits would need to be cut for all current and future beneficiaries to about 80% of scheduled benefits.2 Over the longer term, changes to the full retirement age or means testingâwhich could reduce or eliminate benefits based on your other income sourcesâmay also be considered.
If you’re skeptical about the future of Social Security or wary of potential changes, you may be tempted to start benefits early, assuming that it’s better to have something than nothing. Regardless of your situation, if you are concerned about the future prospects for Social Security, then that’s a good reason to save moreâand earlierâfor your retirement.
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If You’re Not Sure Why You Received A Payment
If you receive a check or direct deposit payment from the Treasury Department and do not know what its for, contact the regional financial center that issued it. Only the agency that authorized the payment can explain why you received it.
If you received a check, look for the RFCs city and state at the top center. Then contact that RFC to find out which federal agency authorized the payment. It will be one of these:
If you received payment byelectronic funds transfer , or direct deposit, follow the directions under Find Information About a Payment.
Use the Treasury Check Verification System to verify that the check is legitimate and issued by the government.
How To Calculate The Social Security Breakeven Age
Your Social Security breakeven age is the point in your life when the total of those lower benefits comes to equal the total of benefits that you would have received if you had waited to take your benefits at FRA, or even later.
For example, if you were born in 1960, your FRA is 67. If you choose to begin receiving Social Security income at age 62, which will be in 2022, then your FRA benefit will be reduced by 30%. Assuming that the full monthly benefit would be $1,000, you will be left with a monthly Social Security check of only $700.
If a co-worker with the same birth date and similar earnings history elects to receive their benefit at FRA five years later, then their benefit will be $1,000 each month. For the first five years, you received a total of $42,000 , while your co-worker received nothing, so you are ahead. Once your co-worker starts receiving benefits, however, they get $300 more each monthor $3,600 more each yearthan you do. So when will your co-worker catch up to you in total benefits?
Lets divide the amount by which you are ahead by the higher amount per year that your co-worker receives. The answer is when you are both 78 years and eight months, or 11.67 years after your FRA. After this point, your co-worker will earn more over their lifetime than you will.
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How Social Security Benefits Are Projected At Retirement
As noted earlier, Social Security benefits are calculated as an income replacement rate based on 35 years of your historical earnings . Which means when youre just getting started in your career as a teenager or 20-something, most of your 35-year average of earnings would be $0s, and any projection of Social Security benefits based on actual earnings would be near $0 in the early years. You wouldnt really know how well your Social Security benefits were on track to replace your income in retirement until you actually had 35 working years to see the cumulative benefit .
Accordingly, the Social Security Administration provides a regular statement to project future Social Security benefits, assuming that you will continue to earn at your current income level . This is shown as your estimated taxable earnings per year after 2017 on the front page of the Social Security benefits statement. And projected benefits on the Social Security statement assume that amount will continue to be earned in every year until full retirement age which can substantially change the individuals historical earnings for calculating benefits .
Example 2. Andrew is a 32-year-old whose income has averaged about $35,000/year over the past 12 years . For the past 2 years, his annual salary is up to $48,000/year.
What If I Take Benefits Early
If you choose to take your own Social Security benefit before your full retirement age, be aware that the benefit is permanently reduced by five-ninths of 1% for each month. If you start more than 36 months before your full retirement age, the worker benefit is further reduced by five-twelfths of 1% per month for the rest of retirement.
For example, let’s assume you stop working at age 62. If your full retirement age is 67 and you elect to start benefits at age 62, the reduced benefit calculation is based on 60 months. So, the reduction for the first 36 months is 20% and then another 10% for the remaining 24 months. Overall, your benefits would be permanently reduced by 30%.
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