Social Security Secrets, Part 1

What’s one of the first things American workers do when they hit the age of 62? Begin collecting Social Security! After all, it’s time, right? 

Not so fast. While many individuals think about and depend upon Social Security retirement benefits, a surprisingly low number understand the advantages of waiting to receive benefits.  Even fewer understand how spousal benefits work.

Studies have shown that the majority of workers will elect to start their benefits at the earliest possible age (62), rather than waiting until what the government calls their “Full Retirement Age” (FRA).  For people born between 1943 and 1954, the FRA is age 66.  But in spite of some considerable disadvantages, most people mistakenly choose to begin collecting at age 62. 

Why wait until age 66?  There are 5 good reasons: 

Reason #1: No Reduction in Retirement Benefits

Retirement benefits are calculated using your “Primary Insurance Amount” (PIA).  This amount is based on the money you earned and paid Social Security taxes on over the years. It can be found on your Social Security statement.  (Get yours at  www.SSA.govmystatement).  For 2012, the maximum individual benefit at FRA is $2,513 per month.

The PIA is the projected retirement benefit you will receive at your full retirement age.  But it is only part of the story. The benefit will be lower if you choose to collect early.  If you begin at age 62, it will be reduced by 25%!  If your accumulated earnings provide a benefit of $2,000 per month, this means that beginning at age 62, there will be a permanent benefit reduction to $1,500 per month.  If you waited until your FRA (age 66), you would earn $500 more per month, for life. And you would also receive cost-of-living increases on the extra $500. 

So by waiting until FRA, you receive 100% of your $2,000 primary insurance amount.

Reason #2: No Earnings Limit

At age 62, you are subject to an earnings limit that is lifted at full retirement age. Stated simply, if you earn more than $14,640/year, you may have to give some of your benefits back.  It’s important to understand the distinction between “collecting” and actually “retiring.”  Many people choose to begin collecting at age 62, even though they are still working. For every $2 of earnings above the $14,640 threshold, retirement benefits prior to FRA are reduced by $1. At FRA, your benefit is recalculated, and you recover some of the benefits lost.

So by waiting until FRA, you would no longer be subject to this earnings limit.

Reason #3: Deferred Retirement Credits Become Available at Age 70

What happens if you choose not to collect, even if you reach your FRA?  By delaying, you will be entitled to a credit of up to 8% each year until age 70.  In our previous example, if you wait until age 70, your $2,000 monthly retirement benefit will increase by 32% to $2,640.  It would stay at the enhanced amount for the rest of your life.  Automatic cost of living adjustments (COLA’s) and/or compensation increases in subsequent years also increase the benefit. 

So by waiting until Full Retirement Age, you become eligible for deferred retirement credits.

But are there circumstances where it still makes sense to begin collecting at age 62?  Sure.  Studies have shown that the majority of people who collect early do so simply because they need the money to live. Others elect to take benefits early due to concerns over the long-term viability of Social Security. Know your options.

There will likely be some future changes in the retirement portion of Social Security.  These could include, for example, increasing the FRA for individuals born after a certain date.  Minor adjustments could also be made to the cost of living increase or the contribution level.  So the idea that the program is unsustainable — at least with regard to retirement benefits — may be overstated.  

All of these first three reasons apply to anyone who qualifies for benefits — Social married, single, or a qualifying divorce spouse.  

Tune in tomorrow for Part 2 of this series where we’ll cover the other two reasons to wait on collecting your Social Security benefits, both of which have to do with spousal benefits at FRA.

About the Authors

FRANK L. RAINALDI, CLU, ChFC, AEP (Distinguished) is one of the insurance industry’s leading educators.  He is the primary author of The Kugler System, a complete training system used by numerous major life insurance companies and other financial institutions.  The foundation of The Kugler System is a set of seven different technique books (Estate Concepts, Business Concepts, Retirement Concepts, Life Insurance Products, Life Insurance Applications and Tax Aspects, Family Financial Needs and Uncovering the Secrets of Social Security).

WILLIAM F. RAINALDI, CFP®, AEP is The Kugler Company’s Chief Executive Officer.  He co-founded The Kugler Company in 1991, and is co-author and editor of the bulk of the company’s training materials and software.