What, When, Who and How? The Social Security Decision
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Have you and your spouse discussed when you’ll begin claiming your Social Security benefits? Do you know how much SSI you’ll receive each month and the potential consequences of taking your benefit early?
How much you can rely on Social Security depends on your birth year and income. Baby boomers are living longer. Every year the ratio to workers funding Social Security to beneficiaries shrinks, meaning fewer people are paying in while more people are collecting benefits. While the solvency of the program may not be in question for current and soon-to-be retirees, the future is more uncertain for younger workers.
If you haven’t given much thought to the question of when you or your spouse will begin claiming your benefits, it may be time to start having that conversion. You can read our report on the topic to learn more.
The Basics
In 2023, the Maximum Retirement benefit will be $4,555 per month in 2023, a $361 increase from 2022. Full retirement age (FRA) is currently 66 for workers born between 1943 and 1954. All workers born in those years have already reached FRA. The FRA for workers born between 1959 and 1960 is 67. A worker born in 1960 will reach FRA in 2027.
How Are Social Security Payments Calculated?
Social Security is based on a “credit” system. For example, retirees are only eligible to receive Social Security if they’ve earned at least 40 credits, which equates to about 10 years of employment. What you’re paid in Social Security is based on your average income over your 35 highest earning years. If you earned the most between the ages of 30 and 65, your Social Security will be based on the average income you reported over that time period.
How Much Will My Social Security Be Reduced if I Take the Benefit Early?
Months matter after you turn 62 and begin your Social Security eligibility. You should look at the chart on page three of our Social Security report to see how much your benefits may be reduced by choosing to take your benefit early. The factors that affect your payment include:
The year you were born
The official normal retirement age for your age cohort
How much you earned
Your spouse’s benefit will also be impacted by your decision to begin receiving Social Security early.
For example, if you were born in 1959, your normal retirement age is 66 and 10 months. When you reach that age, you are eligible for your full Social Security benefit. If someone born in 1959 decides to begin receiving their Social Security as soon as they turn 62, they will be 58 months from FRA. A $1,000 Social Security benefit would be reduced to $708 for that early retiree, which equates to a 29.17 percent reduction. Their $500 spouse’s benefit would be reduced to $329, a 34.17 percent reduction.
How much your benefit is reduced will fundamentally depend on the number of months between your 62nd birthday (or whenever you begin taking your Social Security early) and your full retirement age based on your birth year. You should consider consulting a Fullerton Financial Planning financial advisor for an estimate of your benefit if you’re thinking about applying for Social Security early.
What Are Spousal Benefits and Who Is Eligible to Receive Them?
Derivative Social Security benefits, often referred to as spousal benefits, is 50 percent of the higher earner’s benefit at full retirement age. If the higher earning spouse takes their Social Security early, the spousal benefit will be reduced by five percent more than the primary beneficiary’s reduction percentage.
If the beneficiary’s Social Security reduction is 25 percent, the spouse’s benefit will be reduced by 30 percent. That means a beneficiary who would have received $1,000 would instead receive $750 and the spouse who would have received $500 would instead receive $350.
What Are Delayed Retirement Credits?
There are many people who aren’t ready to retire when they reach FRA. This may be because you want to save more before you retire or the idea of not working simply doesn’t appeal to you. Workers who stay employed beyond their FRA can earn delayed retirement credits (DRC). These credits accrue each month beyond your FRA birthday, and the rate of your benefit increases the longer you defer your benefit.
If you’re thinking about deferring your benefit, we encourage you to review the rate chart in our Social Security report.
Are You Looking for Social Security Income Guidance?
If you’re trying to make the wisest Social Security benefit decision that takes into account your life expectancy, age and retirement age target, it may be worth your time to consult a retirement planner. The team at Fullerton Financial Planning would be happy to discuss your options and explain the factors that may impact your SSI benefits. Call us at (623) 974-0300 to speak with an advisor today.