When to file for Social Security seems to be an easy decision, one should just file at their “Full Retirement Age,” right? That can be the correct answer, but there are many nuances to filing for Social Security that can have long range implications on how much Social Security income you receive over your lifetime. There are many factors that come into play regarding how you can maximize your Social Security income:
- Are you married?
- Did one spouse have much higher lifetime earnings than the other?
- Are you widowed?
- Are you divorced, but were married to your ex-spouse for over 10 years?
- If you retire before your “Full Retirement Age” is it a good idea to file for early Social Security benefits?
- What happens to your benefits if you keep working even after you have filed?
Let’s start with the basics:
What is Social Security income? It is monthly income you will receive after you have reached at least age 62 that receives an inflation adjustment most years, so the purchasing power of the income rises with inflation. This income is not “free money” from the US Government. You have paid premiums into the Social Security System with every paycheck you have received. You are in effect, receiving benefits that you paid for over your working lifetime.
When calculating how much benefit you will receive from Social Security, the amount will depend on how much income you earned over your working career, how many years you worked, and how old you are when you apply for benefits. This is a basic answer based on a single person’s benefit, but as alluded to above, the answer is much more complex when marriages are involved.
Social Security uses a formula for calculating your monthly benefit that is a bit complex. They look at your annual earnings over your lifetime and then apply an inflation factor to those earnings and then pick the highest 35 years of earnings. If you do not have 35 years of earnings, the missing years are filled in with zeros. The total indexed earnings are divided by 35 to come up with your average annual earnings. Next the Social Security Administration applies a formula which breaks earnings in into differently weighted sections. The key takeaway here is that the greatest impact you can have on this calculation is to have earnings for at least 35 years and avoid as many “zero years” as possible.
The other key factor is the age in which you file. In most circumstances you can file as early as age 62, but that is often not the wisest decision. Issues such as your health status, life expectancy, need for income, whether you plan to continue to work and survivor needs should all play into that decision.
So, when does the Social Security Administration consider you to be “Full Retirement Age (FRA)?” It depends on when you were born:
Year of Birth Full Retirement Age
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67
If you file early, you will get a reduced amount of your full benefit (Primary Insurance Amount, PIA):
Apply At Age If FRA = 66 If FRA = 67
62 75% 70%
63 80% 75%
64 86.7% 80%
65 93.3% 86.7%
66 100% 93.3%
What if instead of filing early, you decide to delay taking benefits? You can increase your benefit by delaying up until age 70. After age 70, your benefit will not increase by delaying:
Apply At Age Benefit will be % of PIA if FRA = 66 Benefit will be 5 of PIA if FRA = 67
66 100% 93.3%
67 108% 100%
68 116% 108%
69 124% 116%
70 132% 124%
As you can see, even before taking into account complicating factors such as marriages, widowhood and divorce there are several decisions that will need to be made regarding Social Security benefits. A further complicating factor is that Social Security is just one piece of your retirement puzzle and should be looked at in the context of your overall financial plan.
Our next article will explore how marriage, divorce and widowhood impact the “when to file” decision.
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