Technically, you may retire at any age you want, but that doesn’t mean you can. Nor does retiring mean you should. There are several reasons why someone would hold off on collecting Social Security and not stopping your contributions to your retirement accounts. You could be missing out on some benefits you didn’t even know you had. That’s why planning for retirement should be more than just contributing to your 401(k) until you reach your mid-60s.
Why your full retirement age matters
To begin with, while you may be eligible for Medicare benefits at 65 and many pension plans have 65 as their retirement age, getting full access to your Social Security benefits depends on the year you were born. If you start collecting any earlier than that, you won’t get full benefits, although you can pay your benefits back and resume holding off collecting your money. If you can hold out till 70, you will get the maximum benefits.
Why has the full retirement age increased?
The age at which you can collect full benefits has gone up and will continue to go up given current legislation, for the simple reason that the program just isn’t getting enough money. Social Security lifts more Americans out of poverty than any other program, which is exactly why it’s so hard to fund.
How is Social Security benefit calculated?
To calculate your monthly benefit, Social Security looks at every year’s earning through the lifetime of your working life up to the Social Security taxable maximum. Your yearly earnings are then adjusted for inflation, a process known as “indexing.” Your 35 highest years of earnings are then used to calculate your average indexed monthly earnings (AIME). This is accomplished by combining all 35 years together and dividing the sum by 35 and dividing that by 12. That gives your lifetime monthly average. This figure is used to get your basic Social Security benefit, known as your primary insurance account (PIA).
As of 2018, the formula used to calculate your PIA is as follows:
- 90% of the first $895 in AIME
- 32% of the amount of AIME greater than $895, up to $5,397
- 15% of the amount of AIME greater than $5,397
The percentages are static but the thresholds used to determine your PIA, known as “bend pounds,” change year to year. The bend points used to calculate your PIA are based on the year in which you first became eligible for Social Security. If you claim Social Security later then your PIA is increased using any cost-of-living adjustments (COlA). These are particular percentages that your PIA would be multiplied by, with that product added to your monthly benefit as a reward for holding out.
How full retirement age affects your benefit
Most Americans start collecting their Social Security before they reach full retirement, so if you can hold off you’ll be in a privileged minority. If you collect early, you will receive less in benefits since you’ll be collecting for longer. If you collect later then you’ll receive more in benefits since you’ll be collecting for fewer years than if you had started earlier.
How the full retirement age affects Social Security
Since so many Americans are living longer, Social Security is predicted to run out sooner rather than later. Some have even suggested making 70 the full retirement age because Social Security may run dry as early as 2034. If that were to happen, however, retirees will still get money from Social Security. Benefits are taxable, which generates revenue, and the program gets money from the interest generated by trust funds. Future retirees will still receive roughly 75% of every dollar that gets put into Social Security.
Should you claim Social Security benefits early?
If you claim up to 36 months early then your benefit will go down 6.66% per year. If claim earlier than 36 months than your benefit will go down 5% per year. There are some reasons you may want to claim early, like if you stop working at 62.
Should you wait to claim Social Security benefits?
If you wait to start collecting Social Security, you get more money. So, if you can, you should wait. If you’re married, waiting also means there will be a greater survivor benefit for your partner.
What if you plan on working after you claim Social Security?
If you haven’t reached full retirement age, then there will be limits to how much you can collect while working. In 2019, for every dollar over $17,640 that you earn (or $1,470 per month), $1 of your calculated benefits will be kept from you for every $2 you earn that exceeds the aforementioned threshold. If you reached full retirement age in 2018, then in 2019 and onward your benefit will be reduced by one dollar for every three dollars you earn in excess of $46,920.
Could your Social Security retirement age change?
Maybe. As already mentioned, Social Security isn’t being funded at adequate levels, which could create challenges down the road for future beneficiaries. Whether that means your retirement age going up depends on the legislation at the time.
Bottom line
Calculating your PIA may be complicated, but it’s imperative to planning for a comfortable retirement down the line. Social Security is just one small part of what our retirement will look like, so understanding how these benefits will work for you and which types of personal investment strategies can supplement them is important, even if retirement feels like a long way off.