Simplifying the Social Security Puzzle

Written by: Sarah Caine

Whether or not you are near retirement, Social Security is probably on your mind.

Social Security is an extremely complex system – the Social Security Handbook has 2,728 different rules governing its benefits – and there are very few people who are an expert on all of them!  However, the basics of Social Security retirement benefits can be broken down into fairly simple components.

First, it’s important to understand the following terms and guidelines:

• Age 62:  The earliest anyone may claim Social Security retirement benefits is age 62.  At this point, you will receive a reduced benefit.  It is reduced because you will be receiving payments for a longer period of time.  The reduction is calculated as a fraction of a percent for every month you have remaining before you reach your Full Retirement Age.

 

• Full Retirement Age (FRA):  This varies from age 65 to age 67, depending on your year of birth.  If you delay claiming benefits until you have reached your FRA, you will receive an unreduced benefit, and you may have more options available.

• Age 70:  For every month you delay claiming benefits beyond your FRA, you will receive delayed retirement credits.  These credits are calculated as a fraction of a percent for every month you delay after reaching your FRA, and they can amount to as much as an 8% benefit increase each year.  Your benefit will reach its maximum at age 70.

 

• Primary Insurance Amount (PIA):  This is the benefit you would receive if you file for Social Security benefits exactly at your Full Retirement Age.  Your PIA is a very important number to know because all early, delayed, or spousal benefits are calculated as a percentage of PIA.

 

Now, how does this all fit together?  Using the guidelines above, a person with a Full Retirement Age of 66 and a Primary Insurance Amount of $1,000 per month could choose between the following:

 

 

As you can see, there’s a pretty substantial increase with a delay.

 

Also please note:  the ages I’ve listed above are certainly not the only ages at which you can begin collecting benefits – you can start at any age between 62 and 70 and the Social Security Administration will adjust your benefit accordingly, tailoring it to the exact month you start collecting.

Now, I’ve told you that your PIA is very important, and you may be wondering: “How can I find out what it is?”  In the past, the Social Security Administration sent an annual Social Security Statement to everyone who was potentially eligible for benefits.  These statements provided a lot of good information, including:

• Estimates of your retirement, disability, and survivors benefits
• Your earnings record
• Estimates of the amount of Social Security and Medicare taxes you’ve paid into the system
• Some general educational information

The Social Security Administration no longer mails out these statements; however, if you go online to the Social Security Administration’s website, http://www.ssa.gov/ , and click on “My Social Security/ Sign in/ Create and Account,” you can obtain your personalized statement quickly and easily.

We’ve covered some of the basics of Social Security retirement benefits – ages, terminology, and how to find out what benefits you may be eligible for.  Understanding the basics of how the Social Security system works and applying those concepts to your own situation can give you a good idea of what to expect when the time comes to apply for benefits.

I’ll be back soon with a follow up post on the best time(s) to start collecting Social Security benefits.  Until then, check out the Social Security Administration’s website for more information and contact your JPP financial advisor with any questions.