Social Security might be the greatest gift the federal government has bestowed on the American people. In 1935 President Franklin Roosevelt signed the Social Security Act into law. In the 83 years since the program’s inception, Social Security has become America’s largest retirement plan. Virtually every working American pays into the program. In 2018 almost 47 million Americans are collecting some form of Social Security retirement benefits.
There are hundreds of ways for an individual to file for Social Security. Married couple have thousands of filing options. Social Security can be complicated, but if you do these six things before you file, you will be on the path to making the best decision for your situation.
1: Determine your full retirement age
You can file for Social Security between the ages of 62 and 70, but full retirement age (FRA) determines when you are eligible to collect your full Social Security benefit. The year you were born determines your full retirement age. If you were born in 1954 or prior to 1954 you reach full retirement age when you turn 66.
If you were born between 1955 and 1959, you reach full retirement age at:
- 1955—you reach full retirement age at 66 years and 2 months.
- 1956—you reach full retirement age at 66 years and 4 months.
- 1957—you reach full retirement age at 66 years and 6 months.
- 1958—you reach full retirement age at 66 years and 8 months.
- 1959—you reach full retirement age at 66 years and 10 months.
If you were born in 1960 or later you will reach full retirement age when you turn 67 years old.
This free Social Security workshop will be held at 6:30 pm on November 13th and November 15th. The workshop will teach attendees the most common strategies and filing situations for individuals and couples. Registration is free, attendance is limited. A catered, full-service buffet will be provided.
2: Know how your retirement age will impact your Social Security benefits
Your full retirement age determines when you are eligible to collect your full Social Security benefits. If you file prior to your full retirement age, you will receive less than your full retirement benefits. If you file after your full retirement age you can receive more than your full retirement benefits.
If you file before your full retirement age you will see a reduction in benefits at 6 2/3% per year or 5/9% for each month in the 36 months before full retirement age. If you file more than 36 months before your full retirement age, your benefits will be reduced at 5% per year or 5/12% per month.
The math can be a little complicated, but it’s not difficult to understand. Let’s look at an example:
Michelle’s full retirement age is 67 and she decides that she would like to retire on her 62nd birthday. Michelle knows that 62 is when she will be eligible for Social Security benefits. If Michelle files at 62, she will take a 30% reduction in benefits. She will forfeit 6 2/3% for each of the three years before her full retirement age (64-67) for a total of 20%. For the two years after that (62-64) she will lose 5% per year or 10%. In all, Michelle will lose 30% of her full retirement benefit.
But Michelle—or you—can receive more than the full retirement benefit. For each month after you reach full retirement age you can earn 2/3% more than your full retirement benefit. This equals 8% a year. This increase maxes out on your 70th birthday.
If Michelle opts to wait until 70 to collect her Social Security benefits, she will receive 124% of her full retirement benefit, or 54% more than if she took her benefits at age 62.
3: Understand how your Social Security benefits are calculated
Now that you understand how full retirement age works, the next thing you need to know is how benefits are calculated.
Your full retirement benefit is also known as your primary insurance amount (PIA). There are several factors used to calculate your PIA. Your lifetime earnings are indexed for inflation and then the 35 highest-earning years are taken together and averaged. This total is then divided by 12 and used in the Social Security Administration’s benefit formula to determine your full retirement benefit.
It’s as complicated a calculation as it sounds, but fortunately there is a simple way to get an estimate of your benefit. At the end of this article you will find a Social Security calculator you can use to estimate your benefits.
You can get a current overview of your lifetime earnings by viewing your Social Security statement. You can create an account at www.ssa.gov and view your statement online.
4: Understand how spousal benefits work
Spousal benefits can have a major impact on Social Security filing strategies. If you are married, divorced, or your former spouse is deceased there are several things you need to know to ensure you are coordinating benefits to maximum advantage.
Spousal benefits have several factors to consider but what it boils down to is this: If one spouse is eligible for more than twice the amount of Social Security benefits than the other spouse, the other spouse will see a boost in their payout by claiming the spousal benefit. The result is that the spouse eligible for the spousal benefit will receive half of the amount of the higher-earning spouse.
Let’s look at another example:
Michelle is married to David. David took care of the home and raised the children for the first 25 years of marriage. David entered the workforce later in life and as a result David is only eligible to receive $447 a month in full retirement benefits. Michelle, a successful business owner, is eligible to receive $2400. If David files for spousal benefits at full retirement age, David will receive $1200 in monthly benefits, almost three times as much as he would receive with his individual full retirement benefit. Spousal benefits—like the individual Social Security benefit—are subject to a reduction if claimed before full retirement age. Unlike the individual retirement benefit, there is no increase after full retirement age.
5: Understand how survivor benefits work
If your spouse or ex-spouse has passed away, you could be eligible for survivor benefits. If you are eligible for survivor benefits don’t make the mistake of missing out on your survivor benefits. It’s a mistake that can dramatically reduce the total benefits you might be due.
If your former spouse has passed on, you can file for survivor benefits as early as 60. While collecting survivor benefits you can delay filing for individual benefits. Once you turn 70 you can collect your individual retirement benefits at 124% of your full retirement benefit. It’s a strategy that can increase your Social Security benefits by tens of thousands of dollars.
6: Make sure you have a retirement plan
Understanding what full retirement age means and the implications of filing before or after your FRA is an important factor in determining how Social Security fits into your retirement plan.
Are you filing in a way that works to the advantage of your spouse? How will Social Security be impacted by taxes? How will you coordinate your Social Security benefits with your other retirement income streams? Do you have a pension, 401k, or IRA? Does it make more sense to file early and forfeit some of your benefit based on other factors in your retirement plan?
These are just some of the things you need to consider. If you want to achieve the retirement of your dreams, you need to make sure you have a plan that anticipates future needs.
The more you know, the better prepared you are for retirement
These six things are the first steps you should take before filing for Social Security retirement benefits. You can educate yourself further through one of our Social Security classes or by meeting with one of our qualified financial advisors. Receiving a thorough Social Security plan analysis and retirement income projection can be the first step in funding the retirement of your dreams.