I have found that most people don’t really understand the details of Social Security retirement benefits. Most couples have between 3 to 12…or more…different options regarding when they start taking the income, whose benefit they base the income on, and more. It is not just a cut and dry benefit. If you sign up without knowing all of your options you could be making a lifelong income reducing mistake.
There is a lot to learn and we are not going to cover all of the details here. I do want to give you some basics that everyone nearing retirement needs to know about their potential Social Security Retirement Income. I will refer to two age bands, those born between 1943-1954, and those born after 1954. The basics are the same for both groups, but some of the details like payout rate and specific dates are a little different.
Know Your 3 Benefit Milestones
There are three basic benefit milestones that you need to be aware of. Let’s call the milestones Early Benefits, Full Benefits, and Maximum Benefits. Each milestone is attached to an age and that age is different depending on which age group you are in. You have the choice on when you start your benefits. If you choose to elect to receive benefits early, you will get less money per month. Alternatively, if you wait until the maximum benefits age, you can increase your monthly benefits quite nicely. Now, most of this is just simple math. Think of it this way: you have a bucket full of Social Security money that you, potentially your employer, and the government have contributed to over your lifetime. You also have a life expectancy…or date you are supposed to die. We now have all the variables other than your start date locked in. Once you pick your start date, we can plug that into the equation to figure out your monthly benefit amount. If you choose to start benefits at the early age, that means you have more years to receive the income, but that also means you will get less per month. If you can wait until the maximum benefit age, the number of years of life is smaller, so you get more each month.
If you choose to receive your retirement benefits at the earliest age possible, you could choose to commence benefits at age 62. If you were born before 1954 your benefit would be 75% of what you could have received if you would have waited until your full benefits age. Those of you born after 1954 will receive 70% of your full benefit amount.
The full benefits age is different for each group. For those born before 1954 the full benefits age is 66. All others have a moving age based on their exact birth date but it will be between 66 and 67. If you elect to start benefits at full retirement age, you will in fact get an unreduced monthly income. Remember the math equation? Someone has taken your expected life and used the amount in your Social Security bucket to figure out your income. If you take it at full benefits age there is no reduction or addition.
But what if you wait to start your income? Yes, you may receive more each month. For those born before 1954 you could receive up to 132% of what you would have received at age 66. All others could increase their monthly income by up to 124%.
Follow me so far? Take it early you get less. Take it later you get more.
You will reduce your income by 6 to 6.25% for every year that you start benefits early.
Now that you know the math, let’s fill you in on how much of an “early use” penalty you will be hit with. It works out to about a 6% reduction per year if you take the income before your full benefit age. For those that were born before 1954 it is a 6.25% per year reduction. For everyone else it is 6%. That can add up over a 30-40 year retirement. Think carefully before you lock in a lower benefit amount.
You can increase your income by 8% for every year that you delay your benefits up to age 70.
If you are in a situation where it makes sense to delay, you may see a nice increase come age 70. No matter when you were born, every year that you delay starting past your full benefit age you may see an 8% increase to your monthly benefit amount. Think about it. Where else will you see a guaranteed 8% increase per year? Then, take that increased amount and multiply it by the number of years that you will receive the income and the numbers can look pretty good.
So those are your basics. There is so much more but if you understand the three basic benefit milestones, you can be a step ahead when it comes to making Social Security decisions.