Social Security is an incredibly important retirement benefits program, with close to 90% of individuals 65 and over in the United States receiving benefits. These benefits represent about one-third of all the income of elderly Americans, with 48% of married couples and 69% of unmarried persons relying on them for at least 50% of their household income in retirement.
Since Social Security will likely be an important source of funds in your golden years, it's essential to understand how your payments are determined and what actions you could take that might increase or decrease them. One of the most important decisions you'll make -- and one that has a huge impact on your monthly check -- is the choice of when to file for benefits and begin receiving Social Security income for the first time.
Social Security changes your monthly payments based on when you file because benefits are decreased if you file early and increased if you wait -- up until age 70. While the retirement benefits program is intended to be structured so retirees receive the same lifetime benefits no matter when they retire, the amount of monthly checks differs a lot depending on your age when you claim.
This guide will explain the changes to your monthly payment you can expect depending on when you file so you can make an informed choice about what's right for you.
How do Social Security benefits change based on when you file?
The Social Security Administration looks at your earnings over your career to calculate a basic benefit you'll receive if you retire at an age designated by law as your full retirement age (FRA).
If you file for Social Security prior to FRA, benefits are reduced slightly for each month early that you claim. The specific reduction depends whether you've claimed more than 36 months before FRA or within 36 months of hitting this milestone age. It's about 6.7% per year for the first three years before FRA and 5% per year if you've claimed more than three years early.
If you file for benefits after FRA, your monthly checks are increased slightly for each month you claim. The total increase is 8% annually. Benefits increase only until the age of 70, after which time there's no further rise in monthly checks if you wait to claim.
Filing later has other effects as well. If you wait until FRA to file, you can work and earn income while receiving benefits with no deductions. But if you file before FRA, earnings from working could result in a smaller Social Security check. Working longer could also result in an increase in monthly benefits if you earn more at the tail end of your career and thus increase the average wages your benefits are based on.
What does it mean to file for benefits at full retirement age?
When the Social Security Act was signed into law, retirement benefits became available to workers at the age of 65, with workers receiving monthly benefits based on payroll tax contributions made during their working lifetime. Later amendments also allowed benefits to be paid to widows and widowers of covered workers, as well as to spouses and minor dependent children. Another change to the law in 1956 established the right of women to claim benefits as early as age 62, and this right was extended to men in 1961.
Those amendments introducing the idea of early retirement meant that benefits had to be actuarially reduced; those who claimed benefits prior to 65 must receive a reduced monthly income to account for receiving benefits longer. Sixty-five was considered full retirement age (FRA), so claiming prior to this time triggered the benefits reduction.
However, 1983 amendments to Social Security law adjusted FRA in recognition of lengthening life spans. Now full retirement age -- the earliest age at which you can file to receive your standard unreduced Social Security benefit -- will be determined based on your birth year. The table below shows what your FRA is, depending on when you were born.
|1937 or earlier||65|
|1938||65 and 2 months|
|1939||65 and 4 months|
|1940||65 and 6 months|
|1941||65 and 8 months|
|1942||65 and 10 months|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 or later||67|
How much would your monthly Social Security payment be if you file for benefits at full retirement age?
Not everyone receives the same standard benefit amount if they retire at FRA, because your monthly benefit is determined based on your specific work history. The standard benefit amount you receive at FRA is called your primary insurance amount (PIA), and there's a specific formula to determine it. To calculate PIA, the Social Security Administration:
- Looks at your earning record over your entire career to determine annual wages in each year you worked. Only wages up to the Social Security wage base limit count. This is an annual income limit above which your income isn't taxed and isn't counted in determining benefits. For 2019, the limit is $132,900, so no income above this threshold is taxed or counted when determining annual wages.
- Adjusts annual wages for each year to account for inflation. This adjustment is made using the Average Wage Index from the year you turned 60. You can learn more about how this adjustment is made in this guide to the Social Security benefits formula.
- Calculates your Average Indexed Monthly Earnings (AIME). SSA adds up your inflation-adjusted wages during the 35 years you earned the most and divides by 420 (12 months x 35 years) to find your average inflation-adjusted wages over your career.
- Sets your primary insurance amount equal to a specific percentage of your AIME. Your primary insurance amount is equal to only a part of AIME because Social Security isn't designed to replace your full wages. And because the Social Security benefit formula is progressive, lower earners actually get benefits equal to a higher percentage of wages than higher-income workers do.
You'll receive your PIA only if you file for benefits to begin at exactly FRA. If you claim benefits even one month before, PIA must be adjusted downward. If you claim even one month after, it must be adjusted upward.
What does it mean to file for benefits early?
Filing for benefits early means you request your Social Security benefits prior to reaching FRA. You could start receiving monthly checks as early as age 62. However, retiring any time before ages 65 to 67 might be considered early filing, depending on your birth year.
You can't file too early, though. You must at least earn enough work credits to become eligible for retirement benefits. You're required to have at least 40 credits and can earn a maximum of 4 per year. You earn credits by earning a certain amount of income each year that you pay Social Security tax on. In 2019, you'd need $1,360 in covered income to receive each credit and would receive the maximum four credits for the year once your annual earnings hit $5,440. The "cost" of a credit, or income necessary to earn one, can change annually.
How much would your monthly Social Security benefit change if you file early?
As already mentioned, early filing results in a reduction in your PIA, so your monthly Social Security check will be smaller than if you'd waited to claim benefits until FRA. The reduction is equal to:
- 5/9 of 1% for the first 36 months before FRA. This is the equivalent of about a 6.7% reduction per year. To figure out your specific reduction, multiply the number of months before FRA by ((5/9) x 0.01). If you retire 18 months early, you'd be looking at around a 10% benefit reduction because 18 x ((5/9) x 0.01) = .10.
- An additional 5/12 of 1% for each prior month. This is the equivalent of around a 5% annual reduction. Say you're retiring 44 months before FRA. You'd first figure out your reduction for the first 36 months by multiplying 36 x ((5/9) x 0.01) = .20. Then add in the additional reduction for the additional 8 months calculated by 8 x ((5/12) x 0.01) = .03. So you'd be looking at around a 23% reduction in benefits.
Multiply your PIA by the reduction for early filing to see what your monthly benefit would be. If you'd receive $1,200 from Social Security at FRA and you retire 44 months early, your reduction would be 23% of $1,200 or $276 -- so your monthly Social Security check would fall from $1,200 to $924.
To help you better understand how Social Security will change your monthly payment based on when you file, the chart below shows the reduction in your monthly benefits check if you file prior to FRA.
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If FRA is...
And you file at...
Your monthly payment will be reduced by this % compared to the monthly payment you'd receive at FRA.
What does it mean to file for benefits late?
If you file for benefits late, you claim them after FRA. If your Social Security income starts even a month after FRA, you'll see an increase in your monthly benefits. For each month of delay, you earn delayed retirement credits that increase your monthly check. However, you see no further increase after age 70, so there's no benefit in waiting any longer once you become a septuagenarian.
Since you stop earning benefits after 70, there's a limit to how many months you can earn delayed retirement credits:
- If FRA is 67, you can earn delayed retirement credits for a maximum of 36 months before turning 70.
- If FRA is 66, you can earn delayed retirement credits for a maximum of 48 months.
How much would your monthly Social Security check change if you file late?
For each month after FRA that you wait to claim benefits, your PIA will be increased by 2/3 of 1% -- up until age 70. This means your monthly Social Security check will be:
- 8% higher than your benefit would've been at FRA if you wait one year to claim
- 16% higher than at FRA if you wait two years
- 24% higher than at FRA if you wait three years
- 32% higher if you wait four years
You can figure out your specific benefit increase by multiplying the number of months of delay by ((2/3) x 0.01). If you wait 14 months after FRA, this would be:
- 14 x ((2/3) x 0.01) = .09
You'd see around a 9% increase in your check compared to what it would've been at FRA. If you'd have received $1,200 at FRA, you'd get $108 more for a total benefit of $1,308 if you waited 14 months to claim.
How else could filing early or late affect your monthly Social Security checks?
Your AIME could also be affected based on when you decide to stop working. This could have a big impact on monthly Social Security checks.
- If you decide to retire early and your work history is shorter than 35 years, the SSA still figures out AIME by looking at average wages over 35 years. Unfortunately, you have years of $0 wages factored in. This reduces your AIME compared to if you'd worked a full 35 years -- resulting in a lower monthly benefit check.
- If you're earning more in your later years than you did at the beginning of your career, which is very common, you could also benefit from working longer. Since SSA takes the highest 35 years of earnings, you could replace some years of lower earnings with later years of higher earnings and raise your AIME. This would result in a higher monthly check.
You could also file, start receiving benefits, and continue working if you want. But the age at which you claim benefits also affects what happens if you work while receiving them.
- If you have already reached FRA and you still work, you can earn as much as you want and continue to receive your full Social Security check.
- If you work in any year before you reach FRA, your monthly check could decline, or your entire benefit could be withheld. That's because SSA withholds $1 of your benefit for every $2 earned above a certain income limit. In 2019, the income limit is $1,470 monthly or $17,640 annually. If you earn $20,640, you've exceeded the limit by $3,000, so $1,500 of your annual benefit would be withheld.
- If you begin working in the year you reach FRA, you could also see a reduction in benefits or get no benefits at all. The SSA withholds benefits if you earn too much in the months before FRA. You'll see a reduction in benefits equal to $1 for every $3 in income above a different income limit. For 2019, the limit is $46,920 or $3,910 monthly. If you earn $49,920 and exceed the limit by $3,000, $1,000 of your annual benefit would be withheld. But once you hit FRA, you can work as much as you want without any reduction in your check.
Consider your work history, as well as whether you plan to work while receiving benefits, to understand how the time you file will impact your check. If benefits are withheld because of working, you do get credit for this and will receive higher Social Security checks later. But there's little point in filing for benefits only to see the entirety of your checks withheld because you're earning too much.
When should you file to maximize your Social Security income?
Social Security is designed so that it shouldn't matter at what age you claim benefits, and you'd still receive the same amount of total lifetime income. If you file early, you get more checks but at a lower amount. If you file late, you get fewer checks but a higher amount. However, people don't always die at the time that actuarial tables predict. If you outlive your projected lifespan, you'd do better by waiting to claim so you get higher benefits for a longer time. If you die before the SSA projected you would, you'd have done better to claim benefits early.
No one has a crystal ball to predict their date of death, so it's impossible to know when to file to get the absolute most income from Social Security. You can, however, calculate how long you'd need to live to break even for delaying benefits and make an educated guess about whether you'll live that long by taking into account your family's health history and your own health history.
To calculate your break-even point for delayed filing:
- Figure out how much your benefit would be at 62. If your FRA is 66 and you retire at 62, you're filing four years early, so you'll see a 25% benefits reduction. If you'd have received $1,200 at FRA, you'll get 75% of that amount at 62 -- $900.
- Determine how many years you want to delay. If you'll wait until 67 to file, you'll wait five years.
- Figure out how much income you'll miss out on by delaying. You'll miss out on receiving $900 checks for 60 months, so you will forego $54,000 in income ($900 per month x 60 months).
- Figure out your benefit at the later age. If you're comparing retiring at 62 to retiring at 67, figure out your benefit at 67. It's one year after an FRA of 66, so you see an 8% increase to your $1,200 benefit and will get $1,296 per month.
- Calculate how much higher your monthly income will be at the later age than the earlier age. By waiting, you'll get $396 more per month ($1,296 - $900).
- Determine how many months you'll need to get the higher check to break even for foregone income. Do this by dividing the missed income ($54,000) by the difference in monthly benefits ($396). You'd need to receive an extra $396 for 136.36 months to make up for missing out on $54,000.
It would take you about 11.36 years to break even. If you begin receiving benefits at 67, you would have to live until 78.36 years old to break even. Live any longer, and you'll get more total Social Security income than you otherwise would've because you keep getting that extra $396 per month for the rest of your life.
Your monthly payment can change a lot based on when you file for Social Security
As you can see, your monthly payment can change a whole lot depending on when you file for benefits. You need to consider your work history before filing, whether you plan to continue working after claiming benefits, and whether you've reached full retirement age or are claiming early or late. If you take all these factors into account, you can decide if you'd rather receive more checks that are smaller or fewer, bigger checks later in life. Only you can make the decision about what's best for your retirement needs.
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