Millions of seniors rely on Social Security for monthly income in retirement. Whether you're getting close to collecting benefits or are still in the heart of your working years, it pays to know some basic facts about the program so that it ultimately serves you well. Here are a few key numbers you should commit to memory.
Your Social Security benefits are calculated based on your 35 highest years of earnings. Those wages are indexed for inflation, added up, and divided by 420 (35 years x 12 months per year) to produce your average indexed monthly earnings. If you don't have a full 35 years of earnings on record, you'll have a $0 factored in for each year you're missing an income. Your average indexed monthly earnings will then get plugged into a formula that will determine what monthly benefit you're eligible for at full retirement age, or FRA.
Keep in mind that when recording your earnings for benefit-calculation purposes, the Social Security Administration (SSA) will only factor in wages up to the annual payroll cap, which changes from year to year. This year, for example, it's $132,900, which means that if you earn more than that, your excess wages won't factor into your benefits calculation.
Eligible recipients get an eight-year window to file for Social Security that begins at age 62, and not surprisingly, 62 is the most popular age to claim benefits. The problem with taking benefits as soon as possible, however, is that you'll face a reduction for each month you claim Social Security ahead of FRA. That reduction amounts to 6.67% a year if you file up to 36 months before FRA, plus another 5% a year for each year thereafter.
That might sound confusing, but in a nutshell, if you're looking at an FRA of 67 and you file at 62 instead, you'll face a 30% reduction in benefits (20% for the first three years you file early, and another 10% for the remaining two years). Furthermore, that reduction will remain in effect permanently unless you manage to withdraw your benefits application within a year of filing, and also repay every dollar you collected in Social Security to the SSA by that time.
Seniors born between 1943 and 1954 have an FRA of 66, which means that's the age at which they're entitled to the full monthly benefit their earnings record entitles them to. If you were born after 1954 but before 1960, your FRA is as follows:
- 1955: 66 and two months
- 1956: 66 and four months
- 1957: 66 and six months
- 1958: 66 and eight months
- 1959: 66 and 10 months
Workers born in 1960 or later have an FRA of 67. Again, that's the age at which you're entitled to your full monthly benefit.
Age 70 is generally considered the latest age to file for Social Security, though technically, there's no obligation to claim benefits at that point. However, age 70 is also when delayed retirement credits for postponing benefits cease to accrue, which means there's no financial incentive not to take benefits at that point.
Here's how delayed retirement credits work: For each year you hold off on benefits past your FRA, those payments go up by 8%. Therefore, if you're looking at a monthly benefit of $1,500 at an FRA of 67 but claim Social Security at 70 instead, you'll boost each monthly payment to $1,860. Best of all, that increase will remain in effect for the rest of your life.
There's much to be gained by learning more about Social Security, so if you've been relatively in the dark to date, be sure to read up on how the program works. The more information you arm yourself with, the greater your chances of filing at the right time and maximizing the benefits to which you're entitled.