In one sense, deciding when to claim Social Security is pretty straightforward provided you have earned the 40 quarters of “credit” required, your choice comes down to: At what age do I want my checks to start arriving? The amount will be based upon the contributions you made during your working life and how old you are when you file to start benefits.
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Most folks understand that if they start Social Security at their Full Retirement Age, or FRA, their check will represent 100% of the benefit they’ve earned. This amount is known as your Primary Insurance Amount, or PIA, and it’s based on the average of your 35 highest years of earnings.
Social Security recognizes that wages have increased over the years, so they adjust your earlier earnings for inflation. For instance, my first job out of college paid $14,000--the equivalent salary today would be considerably higher.
If you don’t have 35 years of earned income, Social Security fills in the blanks with zeroes. Women often end up with lower benefits than they expect because of the years they took off to raise children. On the other hand, the higher income you presumably earn later in your career can cause lower amounts earned previously to drop from consideration. Anyone who took a break from paid income- to help an aged parent, raise kids, go back to school, etc.., can boost their benefit by returning to work. Each year of salary will replace a year entered as $0.
Your PIA is a key number in several ways: it determines the benefit you have earned, and it determines the maximum amount your current spouse as well as your ex-spouse is entitled to claim. For anyone born from 1943 through 1954, “full” retirement age is 66.(1) At this age, the amount you receive will equal your PIA. The earliest age you can claim benefits based upon your own earnings record is 62; the latest age to start is 70.
For today’s retirees, beginning Social Security at age 62 will reduce their benefit by 25%. In other words, if Gina’s benefit at FRA would be $1,000/month, she’ll receive $750 if she starts benefits four years early. On the other hand, if Gina delays filing for Social Security until she reaches age 70, her check will be $1,320/month, 32% higher. Each year beyond your full retirement age that you delay claiming Social Security, the government pays a bonus of 8%. This is called the Delayed Retirement Credit, or DRC. (Lots of acronyms in Social Security-land!)
If Gina starts Social Security at age 67- one year past her FRA- her monthly check will be $1,080. Postponing until age 68 means another $80/month, or $1,160. (Notice that the amount is not compounded--it’s a flat 8% of your PIA.) By waiting four years to start benefits at age 70, Gina’s check will be $320/month higher ($80+$80+$80+$80= $320).
In addition, Gina’s monthly check will increase based upon any cost-of-living adjustments Social Security recipients get over those four years.
The Social Security website offers many resources to help plan retirement. A good place to start is the Retirement Tab (Without peeking, guess who’s featured in those plaid pajamas?!). From here you can get an estimate of what your benefit will be based upon your personal earnings history.
To find out how that age at which you start benefits will affect the amount you receive, go here.
Next week: Social Security basics for spouses, ex-spouses, and widows.
1. Starting in 2021, full or “normal” retirement age begins gradually increasing. By 2027 it will be age 67. To determine at what age you will receive 100% of your benefit, visit http://www.socialsecurity.gov/OACT/ProgData/nra.html
Ms. Buckner is a Retirement and Financial Planning Specialist and an instructor in Franklin Templeton Investments' global Academy. The views expressed in this article are only those of Ms. Buckner or the individual commentator identified therein, and are not necessarily the views of Franklin Templeton Investments, which has not reviewed, and is not responsible for, the content.
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