It's hard to overstate just how important Social Security is to millions of American retirees. Unfortunately, though, it's not always the easiest social program to navigate. There are constant changes that can confuse even the most informed people.
Despite all the complexities surrounding Social Security, one chart reigns supreme in its importance. It shows how Social Security's full retirement age works, and once you understand that component, you'll better understand how benefits are affected by the specific choices you make.
Image source: The Motley Fool.
When you claim Social Security matters
The timing of your benefits claim permanently affects your monthly benefit amount. Your primary insurance amount (PIA) is the monthly benefit you'll receive if you claim benefits at your full retirement age (FRA). Think of it as your baseline benefit.
Regardless of your FRA, you can claim benefits before then (beginning at 62) or delay them past it (until 70).
Claiming benefits before your FRA reduces your monthly payout based on how far away you are from your FRA. If you're within 36 months of your full retirement age, the Social Security Administration reduces your monthly payout by 5/9 of 1% for each month you claim early. Beyond 36 months, the program reduces your benefits by 5/12 of 1% each month. With a full retirement age of 67, someone claiming benefits at 64 would see their payout reduced 20%. A claim at 62 would see it reduced 30%.
Meanwhile, delaying benefits past your FRA increases them by 2/3 of 1% each month, or 8% annually. Although you don't have to claim benefits once you turn 70, they don't increase anymore beyond that point, so there's generally no reason to delay any further.
Spousal benefits also revolve around your full retirement age
Social Security spousal benefits allow people to receive benefits based on their partner's earnings record if one of the following applies:
- They're at least 62 years old
- They're caring for their spouse's child under 16
- They're caring for their spouse's child with a disability
Like standard benefits, spousal benefits are affected by when you claim relative to your full retirement age, but the adjustments are different.
If you're receiving spousal benefits, monthly payouts are reduced by 25/36 of 1% each month before your full retirement age, up to 36 months. After month 36, benefits are reduced by 5/12 of 1% each month. In this case, if your full retirement age is 67 and you claim spousal benefits at 64, monthly benefits will be reduced by 25%. If you claim spousal benefits at 62, they'll be reduced by 35%.
Please note that although standard benefits are increased if you delay them past your full retirement age, these delayed retirement credits don't apply to spousal benefits. Your spousal benefits at your full retirement age are the most you'll be eligible for.
Be aware of earning limitations before your full retirement age
Once you reach your FRA, it's fair game to earn as much money as you'd like without having to worry about any repercussions from Social Security. Unfortunately, this isn't the case when you claim benefits early. Claiming Social Security benefits before FRA and continuing to work will subject you to the Social Security retirement earnings test (RET).
Earning over the limit set by the Social Security RET will reduce your benefits based on how much you exceed the limit and how close you are to full retirement age.
If you won't reach FRA in 2024, the earnings limit is $22,320. Earning above that amount will reduce your benefits by $1 for every $2 over the limit. If you'll reach FRA in 2024, the limit is $59,520. Earning above that amount will reduce your benefits by $1 for every $3 over that amount.
The RET limit typically changes each year, so staying informed about the current year's figure is important if you plan to claim benefits early while continuing to work. The good news, though, is your reduced benefits aren't permanently lost. Once you reach your full retirement age, Social Security will recalculate your monthly benefit in a way that gradually returns the withheld amount.
You may find that earning over the limit is worth the reduced benefits. What matters most is that you're aware of how it can affect your monthly payout, so you can adjust your financial planning accordingly.
