Social Security benefits are a function of age, length of working career, and earnings level. Therefore, we urge you to contact the Social Security Administration to determine your specific benefits. Our discussion here will be more general in nature and cover only the Old Age & Survivor Insurance (OASI) benefit.
Full Retirement Age (FRA)
Full retirement age is the age at which one is eligible to draw 100% of Social Security benefit earned. Retiring earlier than FRA reduces the amount received; retiring later increases the amount of benefit. Once benefits are begun, the amount is constant, subject only to cost of living adjustments (COLAs); that adjustment amount is tied to inflation. Full retirement age for benefits is shown in the following table:
Full Retirement Age
|
Year of Birth
|
Age Required for Full Benefits
|
|
1954 or Earlier
|
66 years
|
|
1955
|
66 years + 2 months
|
|
1956
|
66 years + 4 months
|
|
1957
|
66 years + 6 months
|
|
1958
|
66 years + 8 months
|
|
1959
|
66 years + 10 months
|
|
1960 and Later
|
67 years
|
The earliest age at which one can begin drawing benefits is 62. However, for those born in or before 1955, starting Social Security before FRA reduces the in full benefit by 6.25% per year. For those individuals born in 1960 or later, the reduction is 6.0% per year. Waiting until after FRA to begin drawing benefits increases the benefit by 8% per year until age 70. There are no further benefit increases after age 70.
Cost of living adjustments for Social Security are tied to inflation. In 2017, benefits increased by 0.3%. There have been years in which benefits did not increase; however, the average cost of living adjustment for 1985-2017 has been 2.6%.
Age 62 or Later?
When should one begin drawing Social Security benefits? Should one draw a lesser amount for a longer period of time (longer life expectancy) or a greater amount for a shorter period of time (shorter life expectancy)? That’s a complex question with many variables. What is one’s current financial situation (i.e. does one need the money)? What’s the long term prognosis for life expectancy (current health, heredity, etc.)? How can a couple plan benefits to maximize lifetime income received? There is a “breakeven” point which can be calculated. Consider the following example:
John Smith is entitled to $1500 monthly benefit at his FRA of age 66. If he chooses to begin benefits at age 62, his FRA amount will be reduced by 25% (i.e. 6.25% for 4 years) resulting in a benefit payment of $1125 per month. If he waits until FRA and begins drawing $1500 per month, he will forgo the $1125 per month that he could have been receiving or $54,000 ($1125 x 48 months = $54,000). If he begins benefits at age 66, that forgone amount will be recovered at $375 per month ($1500 benefit at 66 vs. $1125 at 62) which will require 144 months ($54,000 ÷ $375 = 144 or 12 years). Therefore, John’s breakeven age is 78. If he dies before age 78, he made the correct decision to take benefits at age 62; if he lives past age 78, delaying until FRA would have been more advantageous.
Obviously, life expectancy is a key component here. In previous postings we have referenced mortality tables. For the above example, the probability of a male at age 62 living to at least age 76 is 73%. There is a 60% probability he will live to age 80, and a 21% probability of living to age 90.
To compound the problem, beginning Social Security benefits prior to FRA and continuing to earn income has consequences. There is an annual earnings amount allowed ($16,920 in 2017); for each $2 earned above that amount, Social Security benefits are reduced by $1. That restriction no longer applies if one draws benefits at FRA. There are special rules that may apply here, so individual circumstances must be considered.
The Bottom Line
Social Security benefits are a key component in retirement planning. How and when those benefits are begun can have a significant impact on long term financial well-being. We at Paragon Financial Advisors can assist our clients in planning for their future. Please call us to discuss your specific circumstances. Paragon Financial Advisors is a fee only registered investment advisory company located in College Station, TX. We offer financial planning and investment management services to our clients.
