Full Retirement Age matters because if you misunderstand it, you could get about 30% less Social Security retirement benefits over your lifetime. That is a lot of money. So, let’s start by defining what it is not.
What Full Retirement Age IS NOT.
If you participate in Social Security and turn 62, you are eligible to receive a monthly benefit. But don’t get too excited. That payment is an early retirement benefit, NOT a full retirement age benefit.
Full retirement age when you become eligible to receive full retirement benefits from Social Security. So what does that word salad mean? The early retirement benefit is about 30% less than the full retirement age benefit. And here is where it gets a little complicated.
Full retirement will either be somewhere between the ages of 66 and 67. The exact date depends on the year you were born.
If you were born between 1950 and 1954, your full retirement age is 66. If your birthdate is from 1955 until 1959, you add two months to the age of 66. Then for those born in 1960 or later, their full retirement age is 67.
There is an important lesson to learn about the full retirement age. If you are currently collecting Social Security or close to that age, there is less possibility that your Social Security retirement benefits will decrease. Additionally, there is less chance that the age of collecting benefits will change for older Americans. The only way that will happen is if a majority of politicians decide to ignore senior citizens. And most of them want to be re-elected, so a drastic change will probably not happen.
Could history repeat?
However, if history indicates what Congress may do, millennials and younger Americans should plan some flexibility in their future retirement dates. Accordingly, there is a greater chance that how Social Security is paid for them may change. Keep this in mind, from 1935, when Social Security was established until 1983 full retirement age was 65. Then in 1982, experts estimated that the Social Security trust funds had five years before they ran out of money.
Then like now, it is important to clarify that if the Social Security Trust fund does run out of money, that does not mean that Social Security will stop paying retirement benefits. The worst-case scenario is that if the trust fund runs out of money, retirement benefits can come directly from incoming Social Security taxes or FICA. In today’s times, payroll taxes could support about 78% of Social Security retirement benefits.
If Congress kicks the can down the road and waits to the last moment before the trust fund is close to being depleted, it’ll be five to ten years before they do anything. That means that if you are expecting to retire in ten years or more, you might want to discount the value to expect from Social Security. That does not mean Social Security is expected to go away. If anything, benefits could be reduced in some way, such as extending the eligibility for benefits even further. As a result, full retirement ages may increase to 68 or even 70.
How to get the most out.
The key to understanding the full retirement age is knowing when you can get the full amount you are due. In the first 36 months after age 62, the monthly benefit increases by about 6.67 percent per year. From age 65 until full retirement age, the monthly benefit increases by about 5% per year. If your full retirement age is 66 or 67, expect the increase to that age to be about 5% annually as well.
Delaying receiving your Social Security Retirement benefit is one of the safest ways to increase the amount of money you will receive in retirement. But, of course, there is always the possibility that you could not live longer enough to collect enough money to warrant delaying receiving a benefit.
But if you intend to have a long and happy retirement, it would be in your best interest to delay receiving your retirement and allow it to accumulate as long as you can.
You might not get it.
If you qualify for Social Security benefits and you continue to work past the age of 62, you might not be able to get a benefit anyway. Your earnings will be subject to an earnings test between 62 and the full retirement age. There is a $1 reduction for every $2 your earnings are over a specific limit that changes each year.
Rather than go through the formula, let me give you a current example. Your monthly Social Security benefit is $1660, and the earnings limit is $18,960. So if you earn $58,800, your monthly benefit is zero.
But the good news is that you don’t forfeit that money. You just delay getting it. Plus, your future benefit continues to increase because of the delay in taking benefits.
As if it wasn’t already complicated enough, the earnings test is different for the year before reaching your full retirement age. Currently, the earnings limit for that year is $50,520, and the reduction offset is $1 for every $3 over the limit.
Don’t touch that marshmallow!
In the late 1960’s psychologist, Walter Mischel conducted the Stanford marshmallow test. In a sense, Social Security is an adult version of the marshmallow test. For the Stanford marshmallow test, a young child is alone in a room with a marshmallow in front of them. Their enticement is that they will get two marshmallows if they do not eat the marshmallow until the adult returns to the room. Some had the willpower to wait, and some did not.
The question for many senior citizens is, besides having the financial wear with all to delay taking their Social Security retirement benefit, do they have the willpower to put it off? If they do wait, they’ll get more money.
Here’s surprising information from the Social Security Administration in 2018. Even with the financial incentive to wait, most senior citizens don’t. These statistics display the percentage of Americans who claimed their Social Security benefits at different ages.:
- Age 62: 29.7%
- Age 63: 12.8%
- Age 64: 7.7%
- Age 65: 7.0%
- Age 66: 11.3%
- Age 67: 9.5%
- Age 68-70: 22.0%
Why take or delay?
The decision to take Social Security retirement benefits early or late can be based on various factors. First, health is a significant factor. If you have a chronic illness that may shorten your life or a significant family history of dying at an earlier age, then claiming your benefit does make sense.
However, if you look at some of the possibilities for the rest of Americans, waiting as long as possible will benefit you in the long run. Consider this, about four out of ten 65-year-olds will live to be 90. Furthermore, recent findings from the Institute for Health Metrics and Evaluation (IHME) at the University of Washington predict that approximately 20% of women and 12.5% of men will live to live beyond 95.
So the gamble is, what if you do live into your 90s? How will you keep from running out of money as you age? The safest way to increase your income in your older years is to delay taking Social Security as long as the benefit keeps increasing.
Do you want to increase your income even more? You could wait until 70. This is referred to as delayed retirement credits. However, I will save a more detailed discussion on this topic for another day.