In 2020, about 65 million Americans will receive over one trillion dollars in Social Security benefits. Among elderly Social Security beneficiaries, 50% of married couples and 70% of unmarried persons receive 50% or more of their income from Social Security.
Since being signed into law on August 14, 1935 by Franklin D. Roosevelt, there’s no doubt that the Social Security program has become an essential source of income that many retirees rely on throughout retirement. That wasn’t the initial intention for Social Security benefits, but the program has had many changes and amendments over the years which has shaped it into what we know as Social Security today.
Whether or not you think Social Security will be available in the future, it’s currently become an essential piece to the retirement puzzle for many retirees. With that being said, over the next few weeks we’ll dive into the granular details that make up and affect our Social Security, but today we will start from the top and discuss the basics of this program.
Social Security replaces a portion of a worker’s pre-retirement income based on your lifetime earnings. The amount of your average wages that Social Security retirement benefits replace varies depending on your earnings and when you choose to file for benefits. As you work and pay taxes, you earn Social Security “credits.” Most people need 40 credits (10 years of work) to qualify for benefits.
If you choose to retire when you reach your “full retirement age,” you’ll receive your full benefit amount, otherwise known as your “primary insurance amount” or PIA. Your full retirement age (FRA) is dependent on the year in which you were born. FRA is age 66 for those born prior to 1955. Between 1955 and 1959, add 2 months for each year to FRA. For those of you born in 1960 or later, FRA is age 67.
Luckily, there’s flexibility in when you can start drawing on Social Security. If you decide to start your benefit prior to FRA, the benefit will be permanently reduced. On the flip side, if you decide to delay your benefit beyond FRA, you will receive a permanent increase. Besides some exclusions, you can start drawing Social Security as early as 62. While you can delay Social Security for as long as you’d like, there’s no benefit in delaying past age 70 as you will receive no increase in benefit past this age.
Below is an example of someone who has an FRA of 66. This illustration will spotlight the reduction or increase you can expect to receive depending on when you start drawing Social Security:
Retirement date, income, health, and longevity are a few of the considerations that go into deciding the best time to start drawing Social Security. That’s why it’s imperative to work with a financial professional to evaluate and implement the best filing strategy considering your unique situation and circumstances. Next week, we’ll cover in detail how continuing to work and income can affect your Social Security benefit.
Ben Webster, CFP® and Derek Prusa, CFA, CFP®
Co-Founders and Owners of Aspire Wealth
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