Social Security in Your Pocket!

When it comes to Social Security, Americans planning for retirement generally have more questions than answers. “When can I collect my benefit? How much will I get? Which age is best for me to begin drawing benefits?” The answers to these questions are often met with the dreaded, “it depends…” response when asked of retirement planning professionals. In our defense, that is true – there is not a singular one size fits all strategy for claiming benefits. Deciding when to draw Social Security benefits is heavily dependent upon each individual or family’s unique needs. With that in mind, let us explore some of the basics of this crucial retirement resource that paid out over a trillion dollars in benefits in 2020.

Let us start with the first question – “When can I collect my Social Security benefit?” To answer this question, we must first define a concept – Full Retirement Age (FRA). The FRA is the age at which an individual can collect an unreduced Social Security benefit. For those born before 1954, FRA is age 66 or younger. For those born between 1955 and 1959, FRA is 66 and some number of months. Lastly, for those born in 1960 and after, FRA is age 67. Does that mean that you must wait until 66 or 67 to collect Social Security? No, individuals can collect a reduced benefit beginning as early as age 62.

This brings us to the second question – “How much will I get?” Your Social Security benefit is calculated using your average indexed monthly earnings from your 35 highest earning years. Instead of trying to calculate it yourself, set up an account at ssa.gov to find out your estimated benefit. Beyond your earnings history, your benefit is heavily impacted by the age at which you collect benefits. For each month that you collect benefits prior to your FRA, your monthly benefit is reduced. Conversely, if you wait beyond your FRA to collect benefits, you receive Delayed Retirement Credits of 8% per year until age 70!

To better illustrate this, let’s take a look at an example:

Mary is preparing to retire after 40 years working for her employer and is eager to begin enjoying her golden years. She will be 62 when she retires and is trying to decide when she will collect Social Security. Her FRA benefit at age 67 is projected to be $1,800 per month.

If Mary collects right away at age 62, her benefit will be reduced by 30% compared to collecting at age 67, or $1,260 per month. If she waits until she is 65, her benefit will be reduced by about 13.3% compared to age 67, or about $1,560 per month. If she waits until 67, she will receive her full, unreduced benefit. On the other hand, if Mary defers receiving her retirement benefit beyond her FRA, her Delayed Retirement Credits could increase her monthly benefit by 8% per year after FRA, which would be about $2,267 per month at age 70.

The third question we addressed above, “Which age is best for me to begin drawing benefits?” is perhaps the most difficult to answer. As mentioned earlier, there isn’t a simple answer – this is the pinnacle of the “it depends…” response.

Some other important factors that you and your retirement planning professional might consider include:

• What outside sources of retirement income do you have?
• How much income will you need in retirement? How will that amount change over time as debts are paid off or retirement expenses change?
• Do you have a spouse who will be claiming benefits as well? Don’t forget that you are entitled to collect your retirement benefit or up to 50% of your spouse’s benefit, whichever is larger.
• Do you plan to work in retirement? If you collect Social Security benefits prior to your FRA, you are limited in the amount of employment income you can earn. In fact, individuals collecting benefits prior to FRA are limited to earned income of $18,960 in 2021. Social Security deducts $1 from benefits for each $2 earned in excess of the limit. Once you reach FRA, there is no limit to the amount of income you can earn.

The decision of when and how to draw Social Security benefits can have far-reaching consequences on a retiree’s financial security. Remember that developing a Social Security claiming strategy is just one of many aspects of preparing for a successful retirement. So, do yourself a favor, don’t tackle planning for retirement on your own. Find a trusted professional to help you coordinate your retirement resources for a long and comfortable retirement.