Your Retirement Benefit: How It Is Figured

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.

Who Is Eligible For Social Security Benefits

Anyone who pays into Social Security for at least 40 calendar quarters is eligible for retirement benefits based on their earnings record. You are eligible for your full benefits once you reach full retirement age, which is either 66 and 67, depending on when you were born. But if you claim later than that – you can put it off as late as age 70 – youâll get a credit for doing so, with larger monthly benefits. Conversely, you can claim as early as age 62, but taking benefits before your full retirement age will result in the Social Security Administration docking your monthly benefits.

The bottom line: Youâre eligible for Social Security Benefits if youâve paid into the system for at least a decade, but your actual benefits will depend on what age â between 62 and 70 â you begin to claim them.

Maximum Social Security Benefits You Can Get

The maximum monthly Social Security benefit available to someone retiring in 2021 is $3,895, which assumes that:

• They worked 35 years or more
• In their 35 top-earning years, their income met or exceeded the SSA’s maximum taxable amount, so that they paid the largest Social Security tax amount possible for each of those years
• They are retiring at age 70, which entitles them to the maximum delayed retirement credit

For comparison, the table below lists the monthly benefits for workers who plan to retire in 2021 whose earnings met or exceeded the SSA maximum-taxable limit every year of their working lives, from age 22. This situation is far from typical, but it shows the impact of retirement age on Social Security benefits, isolated from other factors.

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Myth #: You Can Claim Early Then Get A Bump Up Once You Reach Full Retirement Age

Many believe there is a “bump up” or “added income” once they reach their FRA. They’ve heard they can claim early at 62, then when they reach 66 or older, their checks will increase to the amount that corresponds to their FRA benefit. That’s a big misperception.

There’s no bumping up of income once you’ve claimed your Social Security retirement benefit. However, anyone receiving a benefit can voluntarily “suspend” that benefit after they reach FRA and resume it as late as age 70. If they do, the annual benefit will increase by 8% per year of delay up until age 70. After that, you get an annual cost of living adjustment, but no increase in your base benefit, which will start automatically the month you reach age 70 unless you specify otherwise.

Read Viewpoints on Fidelity.com: Social Security do-over: Claim, suspend, and restart

In general, you can cancel your Social Security claim if you do so within the first 12 months of receiving benefits.2 You must repay the full amount you’ve received, and the full amount a current spouse or family member received based on your benefit. Then, you’re eligible to claim again at a later date and will receive a larger monthly payment. Each individual can only cancel a claim once in their lifetime.

Do You Plan To Continue Working In Your 60s

Working in your 60s will help you maximize your income and savings.

Your benefits are based on your highest 35 years of earnings. Each year of work can add higher earnings to your record by replacing years with low earnings such as those when you were a student, were unemployed, or took time off to care for someone. When you work and wait to claim until age 70, you can increase your monthly benefit by more than 75 percent! Working in your 60s also gives you more time to save on your own for retirement.Review your earnings record on my SocialSecurity.

Working in your 60s will help you maximize your income and savings.

Your benefits are based on your highest 35 years of earnings. Each year of work can add higher earnings to your record by replacing years with low earnings such as those when you were a student, were unemployed, or took time off to care for someone. When you work and wait to claim until age 70, you can increase your monthly benefit by more than 75 percent! Working in your 60s also gives you more time to save on your own for retirement.Review your earnings record on my SocialSecurity.

You can maximize your benefits even if you work fewer hours or stop working.

You can maximize your benefits even if you work fewer hours or stop working.

Consider working in your 60s for an extra boost to your income and savings.

Consider working extra years in your 60s for an extra boost to your income and savings

Read Also: What The Maximum Social Security Benefit

Personal Information Collection Notice

Personal information collected within this website and by the PSPP Corporation is collected under the authority of section 40 of Schedule 2 of the Alberta Joint Governance of Public Sector Pension Plans Act for pension administration and may be used for quality assurance surveys and voluntary focus groups. Social insurance numbers will be used for Canada Revenue Agency and identification purposes. If you have any questions regarding the collection of this information, contact the PSPP Member Services Centre at 1-877-453-1PSP , or write to: 5103 Windermere Blvd. SW, Edmonton, AB T6W 0S9.

Are Social Security Benefits Taxable

If you have a lot of income from other sources, up to 85% of your Social Security benefits will be considered taxable income. If the combination of your Social Security benefits and other income is below $25,000, your benefits wonât be taxed at all. The amount of your benefits that is subject to taxes is calculated on a sliding scale based on your income. Money that Social Security recipients pay in income taxes on their benefits goes back into funding Social Security and Medicare.

If your retirement income is high enough that your benefits are taxable, how do you pay those benefits? You can ask Social Security for an IRS Voluntary Withholding Request Form if youâd like the government to withhold taxes from your Social Security benefits. Otherwise, youâre expected to file quarterly tax returns to pay these taxes over the course of the year.

That covers federal income taxes. What about state income taxes? That depends. In 12 states, your Social Security benefits will be taxed as income, either in whole or in part the remaining states do not tax Social Security income.

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Your Guide To Social Security Disability Video Hearings

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If you are getting ready for a hearing before an administrative law judge, Social Security offers an efficient method using new technologyâvideo hearings. With video hearings, we can make the hearing more convenient for you. Often an appearance by video hearing can be scheduled faster than an in-person appearance.

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What If I Continue Working In My 60s

Many people whose health allows them to continue working in their 60s and beyond find that staying in the workforce keeps them young and gives them a sense of purpose. If this sounds like something youâd like to do, know that working after claiming early benefits may affect the amount you receive from Social Security. Why? Because the Social Security Administration wants to spread out your earnings so you donât outlive them. If you claim Social Security benefits early and then continue working, youâll be subject to whatâs called the Retirement Earnings Test.

If youâre between age 62 and your full retirement age, and youâre claiming benefits, you need to know about the Earnings Test Exempt Amount, a threshold that changes yearly. For 2022, the Retirement Earnings Test Exempt Amount is $19,560/year . If youâre in this age group and claiming benefits, then every $2 you make above the Exempt Amount will reduce by $1 the Social Security benefits you’ll receive.

Contrary to popular belief, this money doesnât disappear. It gets credited back to you – with interest – in the form of higher future benefits. You may hear people grumbling about the Social Security âEarnings Taxâ, but itâs not really a tax. Itâs a deferment of your benefits designed to keep you from spending too much too soon. And after you hit your full retirement age, you can work to your heartâs content without any reduction in your benefits.

How Social Security Benefits Are Calculated

Qualifying for Social Security in the first place requires 40 work credits or approximately 10 years of work. To be eligible to receive the maximum benefit, you need to earn Social Securitys maximum taxable income for 35 years. The cap, which is the amount of earnings subject to Social Security tax, is $147,000 in 2022, up from $142,800 in 2021.

Social Security benefits are calculated by combining your 35 highest-paid years . First, all wages are indexed to account for inflation. Wages from previous years are multiplied by a factor based on the years when they were earned. This calculation gives an amount comparable to buying power based on the current value of the dollar. Accounting for this valuation change is important because a salary of $14,000, for example, was far more impressive in 1954 than it is today.

Once all wages have been indexed, your average indexed monthly earnings is computed by dividing the sum of all indexed wages by 420 . If you worked fewer than 35 years, a zero is entered for years when you did not work. The benefit amount is then calculated based on factors that include the year when collection begins, whether you have reached FRA, and whether you continue to work while collecting benefits.

Once you reach age 70, there is no reason to wait longer to start collectingyour benefit wont increase further.

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Apply The Social Security Benefits Formula To Aime

Once you know your AIME, put it into the Social Security benefits formula using the bend points in effect in the year that you turn 62. The table below shows the bend points that have applied in recent years:

If you turn 62 in 2019, the bend points to use in your Social Security benefits formula are $926 and $5,583. So, if your AIME was $6,190.48 as calculated above, here’s how your benefits would be calculated:

• 90% of $926 = $833.40
• 15% of $6,190.48-$5,583 = $91.12

Your primary insurance amount would be $833.40 + $1,490.24 + $91.12 = $2,414.76.

If you turned 62 in 2018, different bend points apply: $895 and $5,397. So, if your AIME was $6,190.48, your primary insurance amount in 2018 would be $2,365.16:

• 90% of the first $895 = $805.50
• 32% of $5,397-$895 = $1,440.64

$805.50 + $1,440.64 + $119.02 = $2,365.16.

Social Security Bend Points

The Social Security benefits formula is designed to replace a higher proportion of income for low-income earners than for high-income earners. To do that, the formula uses what are called bend points,” which are adjusted for inflation each year.

Bend points from the year you turn 62 are used to calculate your Social Security retirement benefits. The example in the table below uses 2020 bend points. It works like this:

• You take 90% of the first $960 of AIME.
• You take 32% of the next $5,785 of AIME.
• You take 15% of any amount over that $5,785.
• You total those three numbers.

The result is your primary insurance amount, or PIA, the amount you will receive if you begin benefits at your Full Retirement Age .

Your PIA is rounded to the next lowest dime, and your benefit amount is rounded to the next lowest dollar.

Technically, your PIA is calculated and rounded to the next lowest dime, and then any inflation adjustments are applied. That number is then rounded to the next lowest dime. Next, any increase or decrease based on age is applied. That number is then rounded down to the next lowest dollar.

You can see current and historical bend points and the current year’s bend points on the Bend Formula Bend Points page of the Social Security Administration’s website.

In the example in the table below, you can see how the AIME calculated in the previous step was plugged into the bend point formula to calculate the PIA.

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How Your Benefit Amount Is Determined

Your average lifetime earnings, otherwise known as your Primary Insurance Amount , determine your Social Security benefits. As you can guess, calculating your PIA is complicated because some factors in the formula change annually. Its easiest to get that benefit estimate directly from the SSA, however, knowing how your PIA is calculated is useful in retirement planning. Currently, the two most frequently used PIA calculation methods are:

The simplified old-start benefit methodEvolved from the original 1939 Act formula, this method is used if, prior to 1979, you turned 62 years old, became disabled, or death occurred prior to 1979. It averages actual earnings and uses a table to calculate PIA.

The wage indexing methodIn use since 1979, this method indexes earnings to adjust them to reflect changes in wage levels throughout years of employment, ensuring that your benefits reflect increases in the standard of living. Through this method, your PIA is reached by indexing lifetime earnings up to and including the year you turn 59. Then, your PIA is calculated by averaging your highest earnings for a specific number of years and a benefit formula is applied.

Myth #: Your Benefits Are Based Only On Wages You’ve Earned Before Age 65

How your Social Security benefit is calculated can seem mysterious. However, it’s important to know a few essential facts to aid your claiming strategy. You can use the tools on SSA.gov to do the calculations.

• Your benefit is calculated based on your highest 35 years of earnings they don’t have to be consecutive years or before age 65.
• If you work past age 65, those earning years will be included, so long as they are high enough to be part of your highest 35 years.
• Even working part-time after turning 65 may be part of your highest 35 years of earnings.
• To be eligible for Social Security, you must have a minimum of 10 years of covered employment , which equates to 40 credits in the Social Security system.
• If you don’t have 35 years with earnings, zeros will be included in the calculation.

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