I frequently speak at Social Security educational workshops for clients, prospects, churches and civic groups. My firm also hosts at least one annual educational event specifically for CPAs and attorneys where they receive continuing education credits. Over the years, I the following questions have been commonly asked.
How Is My Social Security Benefit Calculated?
Regardless of your full retirement age (FRA), defined by the Social Security Administration (SSA), your benefit is first calculated at age 62. If you work past age 62 and your earnings result in an increase in your benefits, the SSA will adjust them accordingly.
Each year your annual earnings (up to the Social Security wage base for the respective year) are indexed to account for changes in average wages since the year they were received. Your highest 35 years of indexed earnings are then totaled. The total is divided by 420 (the number of months in 35 years) and rounded down to the next lowest dollar to determine your average indexed monthly earnings (AIME). This means if you don’t have 35 years of work history, the years you didn’t work will count as zero.
Your AIME is then divided into three bend points to determine your primary insurance amount (PIA). The 2017 bend points are as follows:
- 90% of the first $885
- 32% of the amount between $885 and $5,336 ($4,451 if AIME > $5,336)
- 15% of the amount over $5,336
The calculations above are then summed and rounded to the next lowest dime to determine your PIA, which is the amount you will receive if you start your benefits at your FRA. If you start your benefits prior to your FRA, you will get a reduced amount. If you start your benefits after your FRA, you will receive an increase in as much as 8% per year for each year you delay up to age 70. (For related reading, see: Tips on Delaying Social Security Benefits.)
If you want to see how the calculation works using your own earnings history, the SSA has an easy-to-use worksheet on their website.
If I'm Retired, Should I Apply for Social Security Now or Wait Until I'm 70?
I think most folks know the longer you wait to start drawing your Social Security benefit, the more monthly benefit you will receive. What many folks don’t know is for every year you wait past your full retirement age, you get an increase in benefits of 8% per year. So if an individual whose FRA is 66 waits until age 70 to start receiving their benefits, they will receive 132% of their age-66 benefit. For example, if your age-66 benefit is $2,000 but you wait four years to start getting your Social Security at age 70, your monthly benefit will be $2,640.
The best answer to this question however, really depends on your specific individual situation. A lot of factors, including your health, marital status, work history, current and future income needs, and life expectancy need to be considered. Barring the need to get survivor benefits to the maximum available, our firm frequently suggests that individuals go ahead and start receiving their Social Security as early as age 62. This is assuming the individual is not currently working or intends to go back to work, and that they will need to draw down their personal savings, IRA, retirement plan or other investment accounts to supplement their income. Encouraging folks to take Social Security as early as possible may sound like a bold and unpopular stance, especially since many financial planners and advisors make it a practice to encourage everyone to wait to claim as long as possible. However, the unknowns are real—no one knows how long they will live, what long-term healthcare needs they will have, and if they will outlive their nest egg. More importantly, your savings and retirement nest egg can be left to your heirs but your Social Security benefits cannot. (For related reading, see: 4 Reasons You May Not Want to Delay Social Security Payments.)
A financial planner should be able to prepare a detailed analysis to help you make more informed decisions as to when to start drawing your Social Security. This should include a break-even analysis and spousal filing strategies to help married couples maximize their benefits.
How Do the Recent Changes in Social Security Laws Impact Those Applying Now?
Until April 29, 2016, the SSA allowed a filing strategy known as file and suspend. This allowed one wage earner (assuming husband) to file for Social Security on his record but voluntarily suspend getting his own benefits. This would allow his wife to claim benefits on his record, getting as much as 50% of his primary insurance amount if she claimed at her full retirement age. The husband could then let his own benefits grow at 8% per year until age 70. (For related reading, see: Social Security Changes for 2016.)
In addition to the elimination of the file and suspend strategy, the change impacted these filing strategies:
If you were born on or after May 2, 1950 but before January 2, 1954: You still have the option to file a restricted application for spousal benefits. This allows you to let your benefits grow at 8% per year until age 70 while receiving benefits based on your current or former spouse’s work record. Currently, there is no deadline for filing your restricted application; it can be done any time upon your attainment of age 66, but before age 70.
If you were born on or after January 2, 1954: Any claim you make for Social Security benefits will automatically trigger a claim for the greater of benefits based on your own record or those based on your current or former spouse’s record.
(For more from this author, see: Ready to Enroll in Social Security? Here's What You Need.)
Securities offered through Triad Advisors, Inc. Member FINRA/SIPC. Advisory services offered through Meld Financial, Inc. Triad Advisors and Meld Financial are not affiliated