Preparing for retirement involves more than saving money. You also need to understand how much you can withdraw safely each year and how much you can expect from other sources, like Social Security. In the latter case, there's a range of possible answers. It all depends on when you sign up for benefits.
If you want to squeeze as much money as possible out of the program, you need to weigh all your options carefully. The chart below should help you decide the optimal age for you to apply.
How the government determines your Social Security benefit
The first step in calculating your Social Security benefit is figuring out your average indexed monthly earnings (AIME). That's your average monthly earnings over your 35 highest-earning years with some adjustments for inflation.
The federal government takes this and plugs it into the benefit formula that was in effect in the year you turned 62. For those born in 1960, the formula looks like this:
Multiply the first $1,024 of your AIME by 90%.
Multiply any amount between $1,024 and $6,172 by 32%.
Multiply any amount over $6,172 by 15%.
Total your results from the three steps above and round down to the nearest $0.10.
The formulas for other years are pretty similar. The only things that change are the bend points — $1,024 and $6,172 in the example above. The government maintains a list of bend points from previous years if you want to determine the formula for a different year.
The results from this step tell you your primary insurance amount (PIA). For some, this is the same as your monthly benefit, but for a lot of others, it's not. If you want your PIA, you have to delay benefits until your full retirement age (FRA). That's anywhere from 66 to 67 for today's workers. You can claim earlier or later than this if you want, but then the government has to run an additional calculation to find out how much you actually get.
How your claiming age affects your benefit
Every month you claim Social Security earlier than your FRA shrinks your checks a little, while every month you delay increases them slightly. The following table illustrates how much of your PIA you'll get at various claiming ages depending on your FRA.
Full Retirement Age of 66
Full Retirement Age of 67
The chart begins at 62 because that's the earliest you can sign up for Social Security and it ends at 70 because that's when you qualify for your maximum benefit. No one will make you sign up at that point if you haven't already, but delaying further is only going to cost you money.
It might appear from the information above that delaying benefits is the wisest course of action, but this isn't always the case. Delaying benefits can lead to a larger lifetime benefit if you live into your 80s or beyond, but it also forces you to fund retirement entirely on your own until then. Not everyone can afford to do this.
Claiming early also doesn't make sense for those with short life expectancies and those who have dependents who can also claim Social Security on their work records. In these cases, signing up early could give you more money than waiting.
It's up to you to decide which claiming age is right for you, and it's usually a good idea to do so before you retire. Having an idea of how much you can expect from Social Security will help you determine how much you must save on your own to cover all your retirement costs.
If you're not sure when to sign up, creating a my Social Security account could help. There's a tool here that can show you your estimated monthly Social Security benefit at any given month between 62 and 70. You can also see how changes to your income could affect your future Social Security benefit.
Choose a few starting ages and multiply their monthly benefits by 12 to get your estimated annual benefits. Then, multiply each of these by the number of years you expect to claim benefits to get your estimated lifetime benefit. For example, a monthly benefit of $2,000 claimed for 20 years gives you a lifetime benefit of $480,000.
Go with the age you believe will provide you with the largest lifetime benefit if you're able to wait that long. And don't be afraid to change your Social Security strategy over time if your retirement plans change.
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