There are a lot of misunderstandings surrounding Social Security. Some of them could lead to big mistakes when planning for how your retirement benefits will help support you in your later years.
To make sure you make the right choices about your benefits, here are three numbers that you need to know.
1. 66 and 2 months to 67
This number refers to your full retirement age, which is important because the age when you claim benefits in relation to your FRA will determine the amount you receive.
Every retiree has a standard benefit based on a percentage of average wages earned. It's called the primary insurance amount. But in order to get that standard benefit, retirees must claim their benefits exactly at FRA. The chart below shows what that FRA is, as determined by the year you were born.
If You Were Born in:
|Your Full Retirement Age Is:|
|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 or later||67|
Many people don't end up claiming their benefits exactly at their FRA, though. And if you plan to claim earlier or later, you need to know what impact this will have. Here's what happens when you claim before, or after, FRA:
- For each of the first 36 months you claim benefits before FRA, your check will be reduced by 5/9 of 1%.
- For each month prior to that, your benefits will be reduced by 5/12 of 1%.
- For each month after FRA that you wait to claim, benefits will be increased by 2/3 of 1%.
These early filing penalties or delayed retirement credits add up. For each of the first three years you claim before your FRA, you'll end up with a 6.7% annual benefit decrease, and for each prior year, it's a 5% cut. The delayed retirement credits, on the other hand, raise your payment by 8% annually.
This number is the average monthly Social Security benefit. Knowing it is important to develop a realistic expectation of what your benefits will do for you.
They probably aren't going to be sufficient to support you, and they're not designed to be. They'll replace only around 40% of pre-retirement earnings, while you'll need around 80% to 90% (or more) to live on.
Knowing that benefits aren't as large as you might expect can help you plan to build a nest egg that provides the supplementary income you need.
Finally, 2034 is important because that's the year automatic benefit cuts might take effect. This could happen because Social Security has a trust fund that's in danger of running dry. If that happens, benefits can only be paid with current tax revenue coming in, which could lead to a 22% benefit cut.
Lawmakers could prevent this if they take action to shore up the trust fund, but any compromise legislation to do that would likely involve changes such as moving full retirement age later or reducing the annual raise retirees get by changing the formula by which it's calculated. In other words, benefits will probably end up being cut anyway.
Future retirees need to be prepared for the possibility they could get less retirement benefits than planned, so they can make sure they aren't overly reliant on Social Security.