Age is one of the most important factors in determining how social security retirement benefits are paid. You can start collecting benefits when you reach 62, but the amount will be lower until you reach Full Retirement Age (FRA). Only then will you will be entitled to full benefits and not a day before. However, you can also delay collecting social security even after the FRA, which will increase the benefits that you will receive later in retirement.
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How are Social Security Retirement Benefits Determined?
The most important thing to remember about how the government calculates social security benefits is that they depend on your lifetime earnings. Benefits are calculated by applying a formula to your earnings; this will be your “primary insurance amount,” which you will receive when you reach full retirement age.
Your actual earnings are adjusted to account for changes in average wages since you started working. Social security will also take into account monthly earnings during the 35 years in which you earned the most. This means that if you worked for 45 years, but during the first 10 years your wages were lower, only the remaining 35 working years are taken into account.
Understanding Full Retirement Age
Your Full Retirement Age depends on the year in which you were born. If you were born between 1943 and 1954, you will reach full retirement at 66; while those born after 1960 will have to wait until 67.
If you choose to receive benefits before full retirement age, you will get a diminished amount, calculated based on how many years you have left until your FRA. For example, if your retirement age is 66 and you start applying for benefits at 62, you will receive 30% less in monthly payments.
Here is how social security benefits are reduced based on the age at which you start receiving monthly payments:
- 63—about 25%
- 64—about 20%
- 65—about 13.3%
- 66—about 6.7%
If you delay benefits past your full retirement age, they will increase by an average of 8% per year for an average 32% increase by age 70, when you are obligated to start receiving benefits.
When Should You Claim Social Security Benefits?
It is important to know the best time to claim benefits to maximize your earnings. If you claim benefits at 62, you will receive more payments, but at a lower value. You can choose to stop receiving benefits during the first 12 months of starting, but keep in mind that you will have to repay the amount back to the government. You can also delay receiving benefits after the retirement age, which is called a voluntary suspension.
The benefit of opting for benefits when you reach 62 is that you will have an extra source of income earlier, but the downside is that you will reduce the survivor benefits available for your spouse.
Also, keep in mind that if you claim benefits and still work at 62, your benefits will be reduced if you earn over the limit. In 2018, the annual earnings limit is $17,040. Any salary that goes over that will make you ineligible for benefits, and you may have to pay back earned benefits if your income is too high.
Another thing to keep in mind is that only wage income affects benefit payments, and not investment income. If you have an investment account, you can draw funds from it without diminishing your retirement payments.
The advantage of opting for benefits after 62 is that you will receive higher monthly payments. However, keep in mind that delaying social security for too long may not be the best idea, as you reduce the time you will receive benefits.
For example, if you delay benefits until 70, but live only to 76, then you would have been better off claiming social security earlier into retirement. You can review your family history and assess your own health to determine the most optimal time to claim your benefits.
Are Social Security Benefits Tax Free?
If, besides your social security benefits, you have other sources of income that are higher than $34,000, under the current tax law, 85% of your benefits will be taxed. Many seniors are surprised to see how much tax liability their benefits carry, and it is important to be aware of this, especially if you plan to apply for retirement benefits while still working.
What counts as extra income? In short, almost anything, including wages, self-employment earnings, interest, dividends and pensions. The taxes you pay on your benefits are determined by a formula that takes into account factors like marital status and your overall financial situation.
In some cases, it is best to wait until full retirement age to claim social security benefits, unless you do not have any other means of income. Claiming benefits while still working will diminish your future savings, and as you advance in age, your benefits will become your main source of income. Drawing from them too early will have the negative effect of earning less when you are in your late 70s, and it will also impact your spouse’s survivor benefit earnings. However, it will entitle you to more years to withdraw from your benefits.
If you are confused about what path is right for you, consider contacting a social security advisor, who can use their expertise to recommend the right course of action for you.
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