As Americans enter their sixties, they are faced with a serious decision about when to take their Social Security Retirement Benefits. To make the best decision, it can be helpful to understand how the Social Security system works, how benefits are calculated, and how these things fit with your personal circumstances, your finances, and your health.

Key Terms and How They are Used to Calculate Your Benefits 

Work Record

The benefits you receive from Social Security at retirement are based primarily on your work record. Your earnings level determines the amount of money you have paid into the Social Security system over your lifetime. The more you earned, the more you paid into the system. The agency uses the 35 years of your highest earnings in its calculations. You must work at least ten years to be eligible for retirement benefits from the Social Security Administration (SSA).

Example: Jane worked for 5 years before she married. She has been a stay-at-home-mom for 20 years. Jane cannot collect Social Security Retirement based on her own earnings record because she does not have enough work credits. However, if she reenters the work force and works for another full five-year period, she will have the 40 credits she needs to collect retirement benefits.

Maximum Taxable Earnings 

SSA considers your annual earnings only up to the designated amount for maximum taxable earnings. This is a dollar amount that is adjusted annually and determines how much of your earnings are subject to Social Security taxes. In 2021, the maximum taxable earnings number is $142,800. If you earn $70,000, all your earnings will be considered in SSA calculations. If you earn $160,000, SSA will only include $142,800.

Average Indexed Monthly Earnings (AIME) 

The SSA uses a formula to adjust your earnings for historical changes in U.S. wages. Then, it takes your 35 best years (the 35 years when you earned the most money), and it comes up with your Average Indexed Monthly Earnings. Remember, this figure is subject to the annual cap or maximum taxable earnings for each year.

Primary Insurance Amount

Once SSA calculates your AIME, it uses a formula to determine your primary insurance amount. The Primary Insurance Amount is the Social Security Retirement Benefit you will receive every month if you wait until your full retirement age to claim your benefits. For example: the formula being used in 2021 breaks down your average monthly wage into three parts:

• 90% of the first $996 of AIME;
• Plus 32% of any amount over $996 up to a maximum of $6,002;
• Plus 15% of any amount over $6002.

The sum of those three figures is your primary insurance amount or your “full retirement benefit.” The sliding scale used is intended to advantage lower paid workers because they tend to need Social Security retirement the most.

There are tools online to help you estimate your retirement benefits, but you will not be able to get an exact dollar figure until you actually apply for your benefits. Other factors can influence your benefit amount, including future changes in your earnings, cost of living adjustments, changes in the law, military service, railroad employment or pensions through your employer.

Benefit Calculation Examples for Workers Retiring in 2021

How does your age at retirement affect your benefit amount? 

You first become eligible to apply for Social Security Retirement benefits once you reach the age of 62 years. The earlier you claim your benefits the less money you will receive. The age for full retirement benefits is trending upwards because of increasing life spans and monetary constraints. The following table represents full retirement age for upcoming retirees.

Age When Entitled to Full SS Retirement Benefits 

If you are 62, and if you made the decision to apply for Social Security Retirement in 2020, you will receive approximately 28.3% less in monthly benefits than you would have received if you waited until your full retirement age. That reduction is permanent. As the age for full retirement increases, the percentage reduction for retiring early will also increase. For those born in 1960 and later, retirement at age 62 will cost them 30% of their full retirement benefit.

You can apply for your retirement benefits at any time between 62 and full retirement age. Every additional month you work beyond age 62 will add a little more to your benefits. For more information about age considerations and retirement benefits, Click Here.

What if I delay benefits beyond full retirement age?   

You have the option of waiting to claim your retirement benefits even though you have reached your full retirement age. Delaying your retirement will earn you “delayed retirement credits” and will increase the amount of your monthly benefit. The maximum delay is until age 70. Deciding whether to delay requires you to make a risk/benefit calculation. How many months of increased benefits will equal the months of income lost from not taking benefits at full retirement age?

Example: Sam reaches full retirement age when they are 66 years and 6 months of age. If they takes their benefits at that age, they will get $2000 per month. However, if they wait until the age of 70, they will get a larger monthly payment, but they will have lost 42 months of benefits. $2000 per month x 42 months is $84,000. How long do they need to live and collect the increased benefit amount to come out ahead?

Deciding when to retire is an individual decision that should be based on your assets, your financial needs, your health, and your personal circumstances.

Note on Medicare: No matter when you chose to retire, consider filing for Medicare in a timely manner. Waiting until later to apply for Medicare can cost you in higher premiums and fewer choices of plan. Medicare plans are required to accept 65-year-old applicants on an equal basis. There are no preexisting conditions, and every 65-year-old applicant who applies for a particular plan pays the same premium. However, if you wait until you are older to apply, you will not have the benefit of those protections.