Chris Stein, CFP®
Waiting to Claim Your Social Security (Part 2)
As we discussed last week, waiting to claim your Social Security benefits has its advantages. The longer you wait before filing, the more you will receive. Age 62 will pay your smallest retirement benefit, while age 70 pays your largest. Your monthly income is based on a percentage of your Primary Insurance Amount (PIA), which is essentially the monthly benefit you are entitled to receive if you wait until your Full Retirement Age (FRA) to file. If you claim before your FRA, Social Security will determine your benefit based on a reduction from your PIA. If you wait until after your FRA to file, they will determine your benefit as an increase to your PIA.
Determined Right Down to the Month
As we reviewed last week, the Social Security Administration (SSA) determines your benefit right down to the month you file. The calculation they use is based on a reduction of your PIA amount. This “penalty” is calculated based on two separate fractions (5/9th and 5/12th) and is quite confusing. To simplify this calculation we encourage our readers to view things a little differently than the SSA. They view a person claiming Social Security benefits before their FRA as a penalty for claiming early. Instead, we encourage readers to view claiming after age 62 as a reward for waiting longer. It’s a slight nuanced difference, we know, but it helps people to understand how with each month they wait before claiming benefits, their lifetime income increases. Last week we described this strategy for people whose FRA age was 66. Today’s blog post looks at people who have a FRA between age 66 and age 67.
For people born after 1960, their FRA is age 67. If they file at age 62 for retirement benefits they will receive 30% less monthly benefits than their age 67 PIA benefit amount. Notice the 30% reduction is five percentage points greater than the reduction a person whose FRA is 66 will receive if they file early. Their reduction is 25%. This is because there are now five years between age 62 and their FRA of 67 and not the four years people with a FRA of 66 have. If someone born after 1960 waits to collect until age 63, when they are just four years from their FRA their reduction for claiming early will also be 25%. (For people born between 1955 and 1959 their reduction for claiming at age 62 is even more difficult to explain! We will blog on this topic at a later date; for now we will leave it at that!)
How Does the SSA Determine the Amount
So how does the SSA determine how much more per month someone born after 1960 will receive each month they delay claiming past age 62? Well, let’s just change the facts of the example given in last week’s blog post. Assume a 62 year old woman has a FRA of age 67 and a PIA of $1,000. If this woman waits until age 67 to file she will receive her full PIA of $1,000 as her monthly benefit. If she files for her benefits prior to age 67 her monthly benefit will be reduced below her PIA, and if she claims after age 67 her benefit will be based on an amount increased from her PIA.
If she claims her retirement benefits at age 62, her benefits will be reduced by 30% from her $1,000 PIA to $700 per month. If we use $700 as her beginning Social Security benefit amount, the SSA will in essence “increase” her benefits by 5/12% of her PIA for every month she delays claiming. This woman will receive a 5/12% increase in her monthly benefit each month she delays claiming for the next two years until reaching age 64. Then at age 64, and for the next 36 months after that, the SSA will increase her benefits by 5/9% of her PIA for every month she continues to delay claiming her retirement benefits. This timeline will take her right to her FRA of age 67. (Remember the woman in last week’s blog with a FRA of 66? She only had to wait one year − until age 63 − before receiving the higher 5/9th percent monthly increase! )
Again, like last week, let’s look at this with actual dollars and not fractions. For the first 24 months after she turns 62 she will have added to her $700 monthly benefit 5/12% of her $1,000 PIA, or $4.17 each month she delays receiving her benefits. After two years, at age 64 and for the next 36 months up to her FRA of age 67, her benefits will be increased by 5/9% of her $1,000 PIA or $5.56 more for each month she delays. (Keep in mind we are not factoring in Cost of Living Adjustments in this example to keep things simple, but in reality she will also receive COLA adjustments)
Social Security benefits should be viewed as a reward for waiting past age 62 and not as a penalty for claiming before your Full Retirement Age (age 66 or 67 for most readers). If you begin with your age 62 benefit (which we concede is a reduction of, or penalty to, your FRA benefit amount) it is pretty easy to determine how much more you will receive each month you delay claiming right up to your FRA.
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