Social Security Retirement Benefits
The Basics. An important part of financial and retirement planning is deciding when to start collecting your Social Security retirement benefits. You can start collecting benefits as early as age 62. Full retirement age (FRA) is 66, if you were born between 1943 to 1954. In this Article, I will focus on the benefits due to individuals who were born during this time period because they have filed or will soon be filing for benefits. If you were born after 1954, your full retirement age will be older. Go to the Social Security retirement planning website at http://www.socialsecurity.gov/planners/retire/agereduction.html to find your full retirement age and to see how your retirement benefits are calculated based on your filing age.
In 2015, the maximum benefit that you can collect is $2,663/month. If you start collecting before your FRA, your benefit will be reduced by about 8% for each year prior to your FRA. If you start collecting at age 62, your benefit will be about 25% less than the benefit you would receive at age 66. This will be your basic retirement benefit for the rest of your life, although it will be increased each year with a Cost of Living Adjustment.
Example: Your benefits will be higher if you start collecting after age 66. For each year that you wait after age 66, you will receive an increase of 4% per year. After age 70, there are no increases to your basic benefit. If your benefit at age 66 is $2,000/month, your benefit at age 70 will be 32% more, or $2,640/month.
If your monthly benefit at age 66 (FRA) is $2,000 or $24,000/year, your benefit if you start collecting at age 62 will be about $1,500/month or $18,000/year. Except for the yearly cost of living adjustment (COLA), this will be your benefit for the rest of your life. It does not increase based on your age. The difference in the basic benefit is $6,000/year. If you collect at age 63 your basic benefit will be about $1,600/month. At age 64, your benefit will be $1,732/month and at age 65, your benefit will be about $1,866/month. The difference in your lifetime benefit depends, of course, on how long you live and yearly COLA.
Another factor to consider is the annual cost of living increase. Your retirement benefit will increase each year as you grow older, based on the yearly Cost of Living Adjustment (COLA). The COLA is based on the “Consumer Price Index for Urban Wage Earners and Clerical Workers”. When it was first applied to increase retirement benefits in 1975, the COLA was 8%. It reached it highest level in 1980 at 14.3%, and in 2015, it was only 1.7%. During the 35 years that the COLA has been in effect, the average annual increase to retirement benefits has been 4.546%. The COLA is applied to the prior year’s benefit amount, not your initial basic benefit.
Example If you filed for benefits in 2010 at age 62 and your retirement benefit was $1,500/month, your benefit increased by 3.5% in 2011 to $1,552. In 2012, your benefit increased by 1.7% to $1,579/month. In 2013, it increased by 1.5% to $1,603/month, in 2014, it increased by 1.7% to $1,630/month/ and in 2015, it increased by 1.7% to $1,657/month.
If you filed for benefits in 2010 at age 66 and your retirement benefit was $2,000 per month, your benefit increased by 3.5% in 2011 to $2,072/month. In 2012, your benefit increased by 1.7% to $2,107/month. In 2013, it increased by 1.5% to $2,139/month, in 2014, it increased by 1.7% to $2,175/month/ and in 2015, it increased by 1.7% to $2,211/month.
Remember that your health and financial need are major factors in your decision about when to start collecting benefits. If you are a healthy 70 year old and there is longevity in your family, it may be worthwhile to wait and collect if you don’t need the benefits at an earlier age. If you are in bad health or need the benefits, it doesn’t make sense to wait. Another factor to consider are the benefits that your spouse can collect when you file for benefits. That issue will be addressed in Part 3 and Part 4 of this series.