Social Security is a huge part of the financial lives of millions of Americans. Since it began decades ago, Social Security has provided a financial safety net that ensures Americans have some income coming in during their golden years.
Social Security has many positive aspects, but a constant complaint I hear is how complex it can sometimes be. There are lots of moving parts to Social Security, and many of them can change annually. One thing I've found helpful is to cut out the noise and focus on the most important and relevant aspects.
When it's all said and done, there's one Social Security chart I consider to be the most important you'll see. It focuses on your full retirement age.
Data source: The Motley Fool.
The role of your full retirement age in Social Security
Your full retirement age is when you're eligible to receive your primary insurance amount (PIA), which is essentially your standard baseline monthly benefit amount. Your full retirement age is important because your monthly benefit is calculated based on when you claim relative to it. Although you receive your PIA at your full retirement age, you can claim benefits before or after that.
You can begin claiming Social Security at age 62, but doing so will permanently reduce your monthly benefit. If you're within 36 months of your full retirement age, benefits are reduced by five-ninths of 1% monthly. Any additional month reduces them by five-twelfths of 1% monthly. For people whose full retirement age is 67, this works out to benefits being reduced by 20% if you claim at 64 and 30% if you claim at 62.
For people receiving Social Security spousal benefits, benefits are reduced by 25/36th of 1% each month before their full retirement age, up to 36 months. Any additional month reduces them by five-twelfths of 1%. In this case, someone whose full retirement age is 67 and claims spousal benefits at 62 would have their monthly benefit reduced by 35%.
Alternatively, you can delay benefits past your full retirement age, increasing them by two-thirds of 1% each month, or 8% annually, until you reach 70. After 70, monthly benefits are no longer increased, so there's no real purpose in delaying them further. Spousal benefits do not increase after someone passes their full retirement age.
Using your full retirement age to determine your break-even age
When you claim Social Security benefits is one of your more important retirement decisions. One method I recommend taking to determine what age is best for you is looking at your break-even age. Your break-even age is when the total amount received from claiming benefits at one age equals that of another.
Claiming benefits early is attractive because you begin receiving benefits earlier. Delaying benefits is attractive because you'll receive a higher monthly amount. Finding your break-even age can help you determine whether either of those strategies is best for you.
For example, let's assume you're debating between claiming benefits at 67 (most people's full retirement age) and delaying until 70. If your PIA is $1,000 at 67, your monthly benefit would be $1,240 at 70. By age 80, you would have received $156,000 total by claiming at 67 and $148,800 total by claiming at 70.
In this example, your break-even age between claiming at 67 and 70 would be 82.5. At that point, the total amount received is $186,000 for both claiming ages. Anytime before that, you would've received more total by claiming at 67; anytime after that, you would've received more by delaying until 70.
You don't want to make your claiming decision solely based on your break-even age, but it can be an important factor to consider along with personal and family health history, current financial situation, and retirement goals.
