If you've reached the age of eligibility for Social Security, or are getting close, there are a few things you should know. While you can claim Social Security as early as age 62, you should be aware of the permanent effect doing so can have on your monthly benefit, as well as how and when to start the application process. Here's an overview of these, as well as a few other, essential Social Security topics you should know before taking benefits.
When can you claim Social Security?
As long as you have earned enough "credits" to qualify, which essentially means that you've worked for at least 10 years in covered employment, you can claim your Social Security retirement benefit anytime between ages 62 and 70.
Full retirement age is 66 years old for people born in 1954 or earlier and gradually increases to 67 for those born in 1960 or later. If you were born from 1955 to 1959, your full Social Security retirement age is between 66 and 67.
However, only about 34% of men and 28% of women claim Social Security at their full retirement age. Most claim early, and 62 (as early as possible) is the most popular age to claim. Overall, the average American claims Social Security at 64.5 years old.
How is your Social Security benefit determined?
Your basic Social Security benefit is known as your primary insurance amount (PIA). This figure is based on your average indexed monthly earnings and does not take into account early or late retirement. (We'll get to those in a moment.)
To calculate your PIA, each year of your earnings, up to the Social Security taxable maximum, is indexed for inflation, and the highest 35 years are then taken into consideration. If you worked for fewer than 35 years, zeros will be used in the calculation for those years.
Your inflation-indexed highest 35 years are then averaged together and divided by 12, which results in your average indexed monthly earnings.
This number is then applied to a formula to calculate your PIA. In 2017, this is:
- 90% of the first $885.
- 32% of the amount above $885 but less than or equal to $5,336.
- 15% of the amount over $5,336.
Know how your claiming age affects your benefits
Your PIA assumes you'll retire exactly upon reaching full retirement age, which, as we've seen, less than one-third of Americans do. If you retire early or late, your benefits will be permanently reduced or increased as a result.
Depending on how early you retire, your PIA can be reduced based on two rules:
- 6.67% reduction per year (0.56% per month) for up to 36 months before reaching full retirement age.
- 5% reduction per year (0.42% per month) beyond 36 months early, to as early as age 62.
So if your full retirement age is 67 and you choose to claim Social Security at 62, this translates to a 30% permanent reduction to your benefit.
On the other hand, if you choose to delay retirement beyond full retirement age, your benefit will be permanently increased by 8% per year (0.67% per month) until as late as age 70.
What if you haven't retired yet?
There's a common misconception that if you're still working, you can't claim Social Security. That's 100% false, although depending on how much you earn and how old you are, some or all of your benefits could be withheld.
This is known as the Social Security "earnings test." As far as Social Security goes, working retirees are divided into three categories.
- First, if you will reach full retirement age after 2017, the first $16,920 you earn per year ($1,410 per month) is exempt from consideration. Beyond this, your benefit will be reduced by $1 for every $2 in earnings.
- Second, if you will reach full retirement age during 2017, the exempt amount is increased to $44,880 for the year, or $3,740 per month. Furthermore, the reduction beyond this amount is reduced to $1 for every $3 in excess earnings, and only those months before the month you'll reach full retirement age are considered.
- Third, if you have already reached full retirement age, the earnings test doesn't apply to you. You can collect your full Social Security benefit regardless of how much you've earned.
If you do end up with a benefit reduction, keep in mind that your benefits aren't necessarily lost. Rather, a benefit reduction resulting from earnings can permanently increase your benefit once you attain full retirement age, although there's no guarantee that you'll eventually recoup the entire reduction amount.
How and when to apply for benefits
Thanks to technology, applying for Social Security can be quite painless. The easiest way to apply is online at the Social Security Administration's website (www.ssa.gov), and the entire application process should take about 15 minutes. For most people, no additional documentation is required.
Of course, if you prefer, you can still apply over the phone at (800) 772-1213 or in person at your closest Social Security office, although it's suggested that you call ahead and make an appointment if you choose this option.
The online application process can be used three months before your 62nd birthday, but you can't apply any further out than four months from when you want your benefits to start. In other words, if you want your Social Security benefits to begin when you turn 66, you can apply when you reach 65 years and eight months of age.
What if you change your mind later?
As a final point, if you apply for Social Security and later wish that you had waited, there may be a way you can get a "do-over." That can be done in two situations.
First, you're allowed to simply cancel your application within one year of claiming and then choose to start your benefits again later, at a higher amount. The big caveat if you want to cancel is that you'll have to pay back all of the benefits you've received, which could be a substantial sum of money.
The other option applies after you've reached your full retirement age. In this case, you have the ability to suspend your Social Security benefits and earn delayed retirement credit. You don't have to pay back anything to take advantage of this option, but it's important to point out that if anyone else is collecting a benefit on your work record, such as your spouse, that person's benefit will be suspended as well.
The bottom line is that while choosing to claim your Social Security retirement benefit isn't necessarily a set-in-stone choice that you can't modify, both do-over options can have significant downsides, so it's important to carefully weigh the pros and cons before deciding to apply for Social Security benefits.