Social Security provides retirement income for millions of Americans, but there's a lot more to the program than many people think. From the calculation of benefits to the application process, here are seven of the most important things you should know and understand about Social Security before you retire.
1. How benefits are calculated
The Social Security formula can be a little complicated, but here's the short version. The Social Security Administration looks at all of your lifetime earnings, up to each year's Social Security maximum, and adjusts them for inflation. Your 35 highest-earning years are then averaged together and are divided by 12 to produce your average indexed monthly earnings, or AIME.
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This figure is then applied to the benefits calculation formula -- which changes with inflation each year -- to produce your initial monthly benefit at full retirement age. This is also known as your primary insurance amount, or PIA.
2. What is full retirement age?
Full retirement age for Social Security is 67 years old for people born in 1960 or later. It is two months earlier for each birth year before 1960 and is 66 years old for people born in 1954 or earlier.
3. The effects of early (or late) retirement
Most people don't start collecting Social Security at exactly their full retirement age. Americans who qualify can choose to start their benefits as early as 62 or as late as 70. Depending on your claiming age, here's how it could impact your benefit.
- The benefit is permanently reduced by 6.67% per year for each year you claim before FRA, up to three years early.
- It is further reduced by 5% per year beyond three years before FRA.
- The benefit is permanently increased by 8% per year beyond full retirement age, until as late as age 70.
So if your full retirement age is 67, this means that if you claim as early as possible (age 62), you're facing a 30% permanent reduction in benefits. By waiting as long as possible (age 70), you'll get a 24% higher benefit than you otherwise would.
4. How to get an estimate of your benefit
Because it's based on 35 years of work, it's impossible to predict your future Social Security benefit with complete accuracy if you're still years away from retirement. However, you can get an estimate based on your actual work history on your annual Social Security statement.
The easiest way to get yours is to create an account on SSA.gov if you haven't already. You can access your statements there.
5. Spousal and survivor benefits
There's more to Social Security than benefits for retired workers. Two programs in particular retirees should understand are spousal and survivor benefits.
Spousal benefits are designed to provide retirement income in situations where one spouse in a married couple either didn't work or earned a disproportionately low income. A spousal benefit can be as high as half of the primary earner's full retirement benefit.
Survivor benefits are designed to provide income to your family if you die before your spouse or young children.
6. When to apply
You can apply for Social Security retirement benefits up to four months before you want to start receiving them, and it's a good idea to do it as soon as possible to avoid any delays. The easiest way to apply is online, which can be done in just a few minutes, but you can also apply by phone or at your local Social Security office.
7. When you'll actually get paid
Finally, one thing retirees are often surprised to learn is that Social Security benefits are paid one month in arrears. In other words, this means that if you start collecting Social Security in January, you won't receive the payment for that month until February. Once you start receiving payments, it will be on a monthly cadence and this won't matter much – but it can be important when you're trying to decide the best time to apply for and start collecting your benefit.
