Social Security is a major component of retirement financial existence. Knowing these facts will help you make informed decisions that may affect your income for the rest of your life.
- FULL RETIREMENT AGE
Full Retirement Age is when Social Security considers you eligible for full retirement benefits. Full Retirement Age used to be 65 for everybody, but the law changed in 1983. Now, FRA varies depending on the year you were born. If you were born between 1943 and 1954, your FRA is 66. If you were born 1960 or after, your FRA is 67. If you were born between 1954 and 1960, you add 2 months for each year after 1954. For example, I was born in 1956 and my FRA is 66 and 4 months.
Why is Full Retirement Age important? It determines when you can receive full or 100 percent of your earned benefit. If you apply for benefits before your Full Retirement Age, your benefits will be reduced. If you apply for benefits after your Full Retirement Age, your benefits will be increased.
The earliest you can apply for Social Security is age 62. If you do apply at that time, your benefit amount will decrease for life. The Social Security Administration states:
“If you start your retirement benefits at age 62, your monthly benefit amount is reduced by about 30 percent.* The reduction for starting benefits at age
- 63 is about 25 percent;
- 64 is about 20 percent;
- 65 is about 13.3 percent; and
- 66 is about 6.7 percent.”
*These percentages apply if your FRA is age 67. If your FRA is before 67, the percentage will be less.
You do not have to begin collecting Social Security benefits at your Full Retirement Age. For each year you wait you receive what are known as Delayed Retirement Credits. For everyone born 1943 or after, your benefit will increase 8 percent each year you delay receiving Social Security until age 70. At age 70 you will have reached your maximum benefit amount and will receive that amount monthly for the rest of your life with periodic cost of living adjustments.
Worth noting: You may begin collecting Social Security at age 62, but Medicare coverage does not start until age 65. You will need to have alternative health coverage in the interim.
- HOW SOCIAL SECURITY BENEFITS ARE CALCULATED
How is Your Social Security Benefit Calculated? How Much Will You Receive?
You need a total of 40 credits to qualify for Social Security retirement benefits. For each $1,260 you make, you earn one credit. Each year, you can earn up to four credits. Once you have earned $5,040 you have earned your four credits for the year and do not accumulate any more.
Once you have qualified, the Social Security Administration takes your 35 highest earning years, converts them to today’s dollars, puts them into a formula, and determines your benefit.
You can obtain a list of your earnings over your working lifetime by going to ssa.gov, clicking on “My Social Security,” and creating a personal account. Here you can view and print your individual statement. You can use the Social Security calculators available to determine your benefit at different times.
Why is this important? You can use this information to help you decide when to begin collecting benefits. For instance, early on in my career, I earned four credits per year but at a very low income. If I continue to work at my current salary, I can replace those low-income years with higher income years and increase my monthly benefit amount for the rest of my life.
To see the difference in your benefit using different parameters, you can use the retirement calculator or benefit estimator provided by Social Security. You can determine what your benefit would be now and what it will be if you continue working. You can see what it will be if you work at your current salary or if you work at a different rate. This can help you make an informed choice as to what age is best for you to retire and also if working longer will make a significant difference in your lifetime monthly benefit.
Not a fun topic to talk about, but crucial just the same. How long your money has to last is an essential part in determining when you want to begin collecting Social Security. To help us out SSA provides a life expectancy estimator. It only takes into consideration your gender and age. Family and your personal medical history are not included and can change the outcome greatly. According to the estimator, my life expectancy is 86.5. My grandfather lived till 91 and my great grandmother until 94. I live in Colorado and have a healthy lifestyle. Like it or not, I may be around for a long time, and I need to take that into consideration and wait as long as possible to apply for benefits. If longevity does not run in your family, you may want to begin collecting early and increase the quality of your life for as long as you can.
What it comes down to is this. Do you want a smaller benefit for a longer time or a larger benefit for a shorter time? The breakeven point where waiting pays off is age 80. If a person waits to collect until age 70 and dies before age 80, he or she will not have gotten the full benefit of waiting.
The 3 critical facts of Social Security—Full Retirement Age, How benefits are calculated, and Longevity—help us determine the best age to apply for benefits. Understanding these will give you the foundation to evaluate how your life circumstances such as being married, single, divorced or widowed affect your monthly benefit amount.
Many people would like to wait until age 70, but find they need the income sooner. They may have lost their job or their house. They may have become sick or injured and been unable to work. They may care for aging parents or boomerang children. Others feel that the years between 62 and 70 may be the best years they have left physically, and they want to spend them enjoying things they may not be able to do later on.
There’s no right answer. Each decision is a personal one and knowing the facts can help you make the one that is right for you.