Your Social Security benefit is determined by 2 things: your earnings history and the age when you begin to collect your benefit.
Your Social Security benefit at your Full Retirement Age (defined below) is known as your Primary Insurance Amount (PIA).
Your Primary Insurance amount is based on a calculation that takes into account your 35 highest years of earnings. Earnings for Social Security only pertains to wages on which you paid Social Security tax. Some jobs, such as teachers in Connecticut, may not pay into Social Security. In this case their Social Security calculation could be different. (This will be discussed in a future post). For the rest of the article we will assume that you worked at a job where you paid into Social Security.
So what happens if you didn’t work for 35 years? Social Security still bases the calculation on a 35 year time frame, but for any year that you didn’t have earnings they will input $0 into the calculation. For example, if you worked 30 years, they will put the 30 years of earnings into the calculation along with 5 years of $0 earnings.
As part of the calculation, Social Security adjusts your previous years wages by inflation. So for example, the wages you made in 1990, will be adjusted by inflation so they are reflective of what those same earnings would be today. Social Security will make this calculation for all previous years wages up until the year you turn 60.
The calculation for Social Security is progressive in nature, however, in general terms, the more money you made throughout your career (and thus paid in Social Security tax) the higher your Social Security benefit will be.
In 2017, the maximum Social Security benefit at someone’s Full Retirement Age is $2,687/m.
The breakdown of how to calculate your Social Security benefit is beyond the scope of this post, but if interested I would direct you to: https://www.ssa.gov/OACT/COLA/piaformula.html
You can get an estimate of your benefit by checking your Social Security statement, which can be accessed online at ssa.gov. On the statement you will see your projected monthly benefit at a few different ages.
A quick note on the Social Security benefits statement for those still working:
• The benefits that are listed for each age make the assumption that you continue working until that age. For instance, your benefit at your full retirement age assumes that you continue working and making the same amount until then. Same with the benefit at 70: it assumes you continue working until age 70. So if you retire earlier than the age you collect, your benefit may be a bit lower than the amount listed on your statement. You can run a calculation of your benefit online at ssa.gov
• Also on the Social Security statement will be your “Earnings Record.” This page outlines each year you worked alongside your “taxed Social Security Earnings” for that year. It’s worthwhile reviewing this page to see if anything looks incorrect. You may see a year when the report shows you earning less than you believe you did. If that is the case, contact Social Security. https://www.ssa.gov/pubs/EN-05-10081.pdf
On top of the benefit calculation based on your earnings history, the amount of your Social Security benefit will also be impacted by the age you start collecting benefits. The earliest you can collect Social Security retirement benefits is age 62. The latest is 70. (You can collect survivor benefits as early as 60, or collect as early as 50 if you are disabled).
The age when you can collect your full or unreduced retirement benefit is known as your Full Retirement Age (FRA).
The Following Table shows what your Full Retirement Age is based on the year you were born:
Joe was born in 1953 so his Full Retirement Age is 66. At Full Retirement age he can collect 100% of his benefit. If he collects his benefit earlier than 66, the benefit is reduced. If he collects later than 66, it is increased.
If you collect Social Security before your FRA, your benefit will be permanently reduced. If your FRA is 66, your benefit will be reduced accordingly:
Bob is 66 and has a PIA of $2,500/m.
If Bob collects his benefit at 62, his benefit is reduced by 25%, so he would collect $1,875/m.
If Bob collects instead at 63, his benefit would be reduced by 20% and so his benefit would be $2,000/m.
The reduction is a monthly reduction. When you claim your benefits early, for the first 36 months your benefit is reduced by 5/9th per month (6.67% per year), and 5/12 (5% per year) per month for the remaining time after 36 months.
If you delay collecting your benefits past FRA then your benefit will increase 8% per year. These increases are known as delayed retirement credits. If your FRA is 66 and you delay benefits until 70 your Social Security benefit will increase 32%.
Bob, from above, has decided to delay his benefit until 70. By delaying, his Social Security benefit will be 32% higher, at $3,300/m.
If Bob decided to collect at 68, his benefit would be 16% higher, at $2,900/m.
Delayed retirement credits stop once you reach age 70, so there is no point in deferring your benefit past that age.
The following chart depicts what Bob’s monthly benefit would for each age he could begin collecting benefits:
An important decision point for retirees is deciding on when to collect Social Security. As the example with Bob shows, he can collect benefits at 62 and receive $1,875/m or he can defer until 70, when he would be eligible to collect $3,300/m. In a future post we will examine ways to approach this claiming decision.
All of the above calculations are made assuming that you are collecting a benefit on your own receord. However you may be entitled to benefits on someone elses record. This can included divorced spousal benefits, spousal benefits, or widower benefits.
John Shanley: CFP ® is a Financial Advisor with Pinnacle. He joined in 2015 after previously working as a Financial Consultant for Fidelity Investments. John is a Certified Financial Planner, a graduate of Fordham University and is currently pursuing his Masters degree in Financial Services. John is a native of Pawling NY and currently resides in Suffield with his wife, Jennifer, who is an Immigration Attorney. In his free time, John enjoys reading and is an avid hockey fan.