In our May newsletter we discussed some of the issues related to Social Security benefits and when to start collecting them. Most people who are at or near retirement age are aware that there are different options for collecting benefits, but they may not know the full array of options or which ones are best suited to their particular situation and needs. For the next three weeks I will be posting additional blogs about some of the ins and outs of Social Security planning, particularly as related to the timing of receiving benefits and additional options that are available to spouses and former spouses.
Today I would like to start with a few basics of Social Security. Like most government programs, Social Security is an alphabet soup of acronyms, which can further confuse and already complicated matter. Here are a couple of the terms with which you should be familiar when thinking about starting to collect benefits:
Full Retirement Age (FRA), sometimes called “normal retirement age,” is the age at which you qualify to receive full Social Security benefits. Your FRA is determined by the year in which you were born. If you were born in or before 1937, your FRA is 65. If you were born in or after 1960, your FRA is 67. For those born between the years of 1937 and 1960, the FRA varies. A full chart showing the FRA for all years of birth is available here.
Primary Insurance Amount (PIA) is the Social Security benefit you receive if you choose to begin receiving your Social Security benefits at your FRA. The PIA formula is the sum of three figures:
A) 90% of the first $767 of your average indexed monthly earnings;
B) 32% of your average indexed monthly earnings above $767 and up to $4,624; and
C) 15% of your average indexed monthly earnings over $4,624.
For instance, if your average indexed monthly earnings were $5,000, then your PIA would be $690.30 + $1,234.24 + $56.40 = $1,980.94. For more details about the PIA, visit the Social Security website’s PIA page.
One of the tricky things about determining when to start taking Social Security benefits is that things like FRA and PIA have fluid definitions. Their formulas may be redefined from year to year, and they are calculated individually based on factors like your year of birth, the amount you earned during your working years, and inflation since that time.
Furthermore, you are not required to start taking your benefits at your FRA. You may opt to begin receiving your benefits earlier than that, or you may choose to delay receipt of benefits until later. Both of these alternatives have pros and cons, and your own circumstances determine which one (if either) is appropriate. Check in over the next three weeks for a discussion of when to start receiving benefits based on three factors: mortality, marital status, and taxation. In the meantime, you may want to check out the Social Security website’s interactive retirement planner.
Next Monday: When to Take Benefits?