In the United States, when you first enter the workforce, you may not pay much attention to Social Security benefits, considering it simply as a deduction from your paycheck. However, Social Security benefits, commonly known as retirement benefits, are an important part of retirement financial planning for many people. The Social Security taxes we pay throughout our careers are an investment in our future. By continuously accumulating this fund, it can come in handy when you retire, stop working, or reduce your working hours.
Deciding when to apply for retirement benefits is crucial, and determining when to start receiving them is equally important. While it may seem obvious to apply for retirement benefits at the legal retirement age, delaying the benefits could have more advantages, including some hidden benefits.
Before understanding the benefits of Social Security benefits for you, let’s first review some basic knowledge of the Social Security retirement system from a perspective close to retirement age. This may involve some unfamiliar terms and abbreviations, but the fundamental concepts are not overly complex.
On another note, you might have come across the term “entitlement” in discussions related to Social Security benefits. This simply means that you and your employer have contributed to the Social Security trust fund through payroll taxes.
Your entitlement to retirement benefits is calculated based on your earnings during your working years, measured in terms of “work credits.” Work credits determine your eligibility to receive retirement benefits upon retirement. You need at least 40 credits, with a maximum of 4 credits per year. Therefore, you need to work for at least 10 years to qualify for retirement benefits.
Two main factors determine how much retirement benefits you can receive. The primary factor is your average earnings and the age at which you choose to start receiving retirement benefits. The Social Security Administration (SSA) will first calculate your Average Indexed Monthly Earnings (AIME) based on the highest 35 years of your earnings. In other words, if you worked for 40 years, starting from the lowest wage and receiving pay raises each year, SSA will calculate your retirement benefits based on your earnings from the most recent 35 years.
If you earned more money in the early years of your career but had lower wages later on, SSA may consider your earnings from the first 35 years. SSA also factors in the national average wage levels to determine your Primary Insurance Amount (PIA), which is the amount SSA should pay you each month.
The age at which you choose to first receive retirement benefits is also a factor in how much you will receive. You can apply at 62 or delay your application. Your Full Retirement Age (FRA) is the age at which you are entitled to receive full retirement benefits as per regulations, but this age is not 62. If you were born between 1943 and 1954, your FRA is 66. For those born in 1959 and later, this age increases to 67. You must apply for your retirement benefits before turning 70.
The first benefit of delaying retirement benefits is that you can receive more money! If you apply for retirement benefits at the earliest opportunity (age 62), your benefits will be lower than if you wait until full retirement age, possibly up to 30% lower.
The SSA provides an online quick calculator to help you estimate your income. While the online calculator may not provide precise information, it is useful for estimates, especially for straightforward situations. For accurate information, you can review your individual records through SSA tools.
The eight-year period between 62 and 70 may not seem long, but it can significantly impact your financial situation after retirement. The dilemma facing American retirees is simple: claim early but receive less monthly payment, or delay receiving retirement benefits for a few years in exchange for higher monthly payments, sometimes substantially higher.
Many people wonder why some are willing to take a 30% cut in retirement benefits by applying early when they have the chance. In reality, early applicants often cite the following reasons:
1. Poor health/unable to work: As you age, your health and physical condition may deteriorate at different points in time. If you face chronic or acute illnesses, disabilities, injuries, or other obstacles, you may have no choice but to retire early. In such cases, you might not have the financial resources to wait.
2. Longevity: If you come from a family known for longevity, with members typically living into their 90s in good health, your situation differs significantly from those who may not expect to reach 70. If you anticipate not living long enough to enjoy the additional 30%, early application could make more sense.
3. Lack of awareness about early filing or the discount: Some people choose to apply early simply because they are unaware that filing for retirement benefits at 62 results in a reduction.
Now let’s explore which situations favor delaying the receipt of retirement benefits.
Even if you are in good health and expect to live beyond 70, you might still want to start receiving retirement benefits soon. This is understandable, especially in times of global economic uncertainty and social and political unrest. However, in most cases, delaying the application would be the better choice. There are several reasons for this:
The most significant advantage of delaying retirement benefits is the increased monthly payment. As mentioned earlier, filing for retirement benefits at 62 means a 30% reduction in the PIA amount. Retirement benefits are calculated based on your lifetime earnings and work duration, making it a crucial part of your retirement income. Delaying receipt means your benefits increase by about 8% each year until you reach 70.
Delaying retirement benefits can also improve your overall financial situation in other ways. The additional monthly income can help you maintain a lifestyle close to what you had while working and assist you in managing the rising medical costs that come with aging. These benefits, in turn, can alleviate the financial anxieties many people experience in retirement.
Surprisingly, delaying retirement benefits may also benefit your spouse. When one passes away, the surviving spouse is eligible to continue receiving the deceased spouse’s PIA benefits. Therefore, by delaying, your monthly retirement benefits increase to your full PIA amount; once you pass away, your spouse can also receive a higher retirement benefit.
Given these factors, how do you decide when to claim retirement benefits? First, consider your health and ability to work. If you are nearing 62 and facing health issues that make it challenging to work at a regular pace, you may need to consider applying.
Similarly, if your family history indicates a shorter lifespan, early claiming might be more advantageous. While no one can predict the future accurately, you can consider:
– Overall health of your parents and siblings after 60
– Family history of severe or terminal illnesses
– Any diagnoses likely to resurface or worsen in old age
– Your general health and lifestyle
Next, analyze your overall financial situation. Is your retirement account sufficiently funded to provide enough income to maintain a comfortable lifestyle? Do you have enough savings, investments, and other income sources to use after retirement? If the answers are positive, delaying benefits may make more sense.
If you decide to delay claiming retirement benefits, the next step is maximizing and fully leveraging your benefits. A direct way is to continue working. If you can work past your Full Retirement Age (FRA), even part-time or in a less demanding role, you can increase your income and consequently, your benefits.
Please note that some strategies once applicable to married couples for maximizing benefits are no longer viable. A well-known example is the “file-and-suspend” strategy.
Previously, when the wife reached Full Retirement Age (FRA), she would apply for Social Security benefits, while the husband would claim spousal benefits. Subsequently, the wife would request SSA to suspend her benefits. Although her benefits were suspended, she accumulated delayed credits, resulting in an 8% annual increase in benefits. Meanwhile, the husband delayed claiming his own retirement benefits while still receiving spousal benefits. This strategy was discontinued by federal legislation in 2015.
Another way to maximize Social Security income is to work with an experienced, qualified financial advisor who can help you develop a personalized strategy. A qualified professional will consider factors such as your spouse’s benefits and estimated retirement benefits, tax implications, and your future plans.
In appropriate circumstances, delaying the application for retirement benefits is a proven successful strategy recommended by many financial professionals and experts. Delaying benefits can help you maximize your benefits, providing you with a more stable income during retirement and easing uncertainties and anxieties that may arise due to sudden life changes.
This critical decision can have various long-term implications. It requires careful analysis, a thorough understanding of the Social Security insurance system, and possibly seeking assistance from financial experts to explore various options and find the most suitable solution. Qualified professionals can assess your financial situation, including your assets, savings, and investments, to help you craft a comprehensive retirement plan, with Social Security benefits being a significant component.
The best time for you to claim retirement benefits depends on your individual circumstances. In certain limited scenarios, claiming early might be the best choice, but in most cases, if possible, delaying retirement benefits can offer significant advantages.