By Michael D. Bird, CFP®, MBA
For those of you who have Social Security on your radar, you need to understand the two things that affect most your Social Security benefits. Namely, your earnings record and when you file. Really? That’s it? Yes, that’s it. But, we’re going to look at the whole system, so that you understand how it works.
First, you have to qualify. Which means that you need to accumulate 40 credits. A credit is worth about $1300 in income in 2017. So, if your job pays you more than $1300 in a quarter, you’ve earned 1 credit. Earning more than that does not increase the number of credits in a quarter, but it does affect your benefits, as we’ll see later on. You’ll need to earn a quarter’s credit 40 times to qualify for a retirement benefit. The good news is that once qualified, you are in for a retirement benefit. It cannot be taken away from you. But this is for retirement only because disability benefits have their own rules.
Social Security looks at your entire work record at age 60 and adjusts them to the current dollars. Keep in mind that the dollar you earned in 1973 is very different in value than the dollar of today, so earnings have to be brought up to date. It’s more complicated than that and for those that are interested, the Social Security website, www.ssa.gov, has the complete explanation. There’s more. Two years later, at age 62, Social Security then adds up the highest 35 years of your earnings record. That number is then divided to give the monthly average, called the Average Indexed Monthly Earnings, or AIME. Then there is another adjustment that benefits those workers with a lower average. The result is the Primary Insurance Amount, or PIA, and that is the benefit each worker would receive at his or her own Full Retirement Age (FRA). For those born from 1943-1954, FRA is 66. So, the earnings record directly affects the amount that is possible at retirement. When you retire determines the actual benefit.
When Social Security was initially proposed, age 65 was the age for starting retirement benefits. Later, the early retirement age 62 was added. But early retirement comes with a cost. For those with a Full Retirement age of 66, the age 62 benefit is reduced by 25%. So for example, someone with a benefit of $2400 per month would only receive $1800 when taken at age 62. In 1983 the normal retirement age of 65 began to change. Now it is 66, at least for those born from 1943 – 1954. For those born in 1955, FRA is age 66 plus 2 months. Every birth year after that sees an increase by two months. For those born in 1956, it is 66 and 4 months. And so on to 1960. Everyone born in 1960 and later has an FRA of 67.
What happens if you want to wait? You may want to leave your job but delay taking Social Security until after FRA because for every year that you wait, the benefit will increase by 8%. Taking the earlier example of a $2400 per month benefit at age 66, the benefit increases to $3168. That is for life, no matter how long you live. Of course every year that amount could increase with the Cost of Living Allowance (COLA). For 2018 the COLA is expected to be approximately 2% higher (see www.ssa.gov/cgi-bin/bri.cgi). By waiting until age 70, the larger benefit is then locked in for life and for a couple, locked in for the surviving spouse if that’s the larger benefit of the two.
The most common question is when to apply. That of course, depends on many factors. Not the least of which is health, expected longevity, the need for the money, and the savings available for living expenses. Everyone has a different situation and couples need to work together on making their decision, because the retirement decision affects the amount of money available early, and it affects the survivor benefit later. Couples should have a Social Security Benefits Analysis made for them that shows all of the options that they can consider, the amount of money each option would provide every year for their life, and the overall comparison of each option to the others. By doing that, each couple can then see the impact of taking their benefits early, or later, and then make a decision. While Social Security does offer a calculator to show the various amounts you might receive at different ages, it does not show a direct comparison between the various strategies. A Benefits Analysis can be run for you by a financial advisor with the knowledge and software to run various strategies. It is especially important to have that benefits analysis printed and available to refer to when applying for their benefit. It can be very helpful if talking with the Social Security agent so that the agent can see for themselves the option that you have chosen.
Understanding Social Security and the benefits that are available will help you to make a decision that will truly affect the rest of your life. You may not realize it, but it could very easily be one of the more important decisions of your life!
Michael Bird, a Financial Advisor with Secure Money Masters in Bristol, TN, is also an adjunct Professor of Finance and has taught at several universities and colleges, including ETSU, Belhaven College and the University of Memphis. He currently teaches a course on Social Security and how to integrate Social Security benefits with Retirement Income. He can be reached at the Bristol, TN office by calling (423)789-2000.
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Disclaimer: This commentary is provided for educational purposes only. The information, analysis and opinions expressed herein reflect my judgment as of the date of writing and are subject to change at any time without notice. They are not intended to constitute legal, tax, securities or investment advice or a recommended course of action in any given situation as it does not address or account for individual investor circumstances. Please keep in mind that no single strategy is the best choice for all investors/retirees. Before investing, investors are encouraged to speak with a financial professional who can help evaluate decisions based on an investor’s complete financial picture and an investor’s time horizon and risk tolerance. Past performance does not guarantee future results. An investment in stocks or mutual funds can result in a loss of principal.