For many retired Americans, Social Security plays a significant role in their retirement income. Whether Social Security will be your only source of retirement income or a supplemental source, it's important to know how it works so you can make your retirement plans accordingly.
Social Security can sometimes seem complicated, but there's one table that people should focus on to help guide many of their Social Security decisions. Here is the most important Social Security table you'll ever see.
| Birth Year | Full Retirement Age |
|---|---|
| 1943 to 1954 | 66 |
| 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 |
| 1960 or after | 67 |
Data source: Social Security Administration
Your full retirement age is your baseline
The table is the most important Social Security table you'll see because your full retirement age is the baseline for many things regarding your retirement benefits. It's the age that you become eligible to receive your full monthly benefit (which is based on your lifetime earnings).
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You can begin receiving benefits at age 62, but doing so will reduce the payments based on how far away you are from your full retirement age. If your FRA age is 67 and you take benefits once you turn 62, they will be reduced by 30% monthly, for example.
You can also delay your benefits past your FRA until age 70, increasing your monthly amount. Although you can technically delay benefits past 70, there's no real need because they won't increase any further.
Taking benefits before your FRA will reduce them by five-ninths of 1% if you're within 36 months of your FRA and five-twelfths of 1% monthly for each month over 36. Delaying your benefits will increase them by two-thirds of 1% for each month past your FRA.
Knowing your FRA can help you determine if taking benefits early, at your FRA, or late is right for you. Without knowing it, it's much harder to understand the financial implications of when you decide to begin receiving benefits.
For instance, you don't want to expect one amount and then receive considerably less because of a bigger benefits reduction than you anticipated. Nor do you want to delaying benefits for the increased benefits, only to end up overestimating how much they will increase.
You can't forget about the retirement earnings test
Taking Social Security benefits doesn't mean you have to stop working or earning money. You just need to keep an eye on how much you make, or at least know the financial implications behind it. Social Security uses a retirement earnings test (RET) if you receive benefits before your FRA and earn over a certain amount.
If you haven't hit your FRA and receive benefits in 2023, your annual earnings limit is $21,240. If you'll reach your FRA in 2023, the most you can earn in the months leading up to your FRA is $56,520. And if you earn over the limit and have your benefits reduced, the reduced amount will be added to your benefits once you reach your FRA.
For instance, let's assume your FRA age was 67 and you decided to take benefits at 65 while earning over the allowed limit. If the RET lowered your yearly benefits by $4,000, Social Security would withhold $8,000 during the two years until you reach age 67. Once you turn 67, Social Security will recalculate your monthly payments, increasing them in a way that would gradually give you your $8,000 back -- if you live long enough.
