Simplifying Social Security: A Guide for Understanding Your Options and Making the Most of Your Benefits
If you’re like millions of Americans, you’ve spent your working years contributing to Social Security. As these years come to an end and you prepare to retire, you’ll probably begin to think about how Social Security will fit into your income plan.
There are a number of factors that should be taken into consideration when filing for Social Security – each of which play a critical role in the benefits you’ll receive during your years in retirement.
Understanding Full Retirement Age
Your full retirement age is the age at which you qualify for 100% of your Social Security benefits and is based on your birth year.
Find Your Full Retirement Age
| Year of Birth | Full Retirement Age |
|---|---|
| 1937 or earlier | 65 |
| 1938 | 65 and 2 months |
| 1939 | 65 and 4 months |
| 1940 | 65 and 6 months |
| 1941 | 65 and 8 months |
| 1942 | 65 and 10 months |
| 1943–1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 and later | 67 |
*If you were born on January 1st of any year you should refer to the previous year. If you were born on the 1st of the month, the Social Security Administration figures your benefit – and your full retirement age – as if your birthday was in the previous month.
Source: SocialSecurity.gov, “Retirement Benefits,” 2019.
Deciding When To Collect
While you qualify for 100% of your Social Security benefits at your full retirement age, you have the option to start collecting benefits either before or after your full retirement age. There are pros and cons to all options.
| PROS | CONS | |
|---|---|---|
Before Full Retirement AgeYou can start collecting Social Security as early as age 62. If you collect early, your benefits can be reduced by up to 30%, depending on your full retirement age. |
You may collect benefits for a longer period of time, depending on longevity. |
You will collect a lesser benefit than what you would have been eligible for at your full retirement age. |
| PROS | CONS | |
|---|---|---|
At Full Retirement AgeYou can start collecting Social Security at your full retirement age to receive 100% of your benefit. |
You will collect full benefits. |
You could collect a greater benefit by collecting after your full retirement age. |
| PROS | CONS | |
|---|---|---|
After Full Retirement AgeYou can start collecting Social Security after your full retirement age and receive benefits that are increased up to 8% annually by accumulating delayed retirement credits. These credits are available each year past your full retirement age up until age 70. |
You will collect a greater benefit than what you were eligible for at your full retirement age. |
You may collect benefits for a shorter period of time, depending on longevity. |
Sources: https://www.ssa.gov/planners/retire/agereduction.html
https://www.ssa.gov/planners/retire/delayret.html
Hypothetical Example
The graph below illustrates how collecting Social Security before and after full retirement age can impact monthly benefits. It assumes a monthly benefit of $1,000 at a full retirement age of 66½.
Source: SocialSecurity.gov, “When to Start Receiving Retirement Benefits,” 2019.
Considering The Effects Of Longevity
With the average life expectancy being 84 for today’s 65-year-old male and 86½ for today’s 65-year-old female, longevity is among the most important considerations in deciding when to start collecting Social Security. The longer your life expectancy, the more advantageous it may be to delay collecting benefits.
Source: https://www.ssa.gov/planners/lifeexpectancy.html
Hypothetical Example
The example below shows total Social Security benefits collected when beginning at certain ages and highlights when waiting to collect becomes more advantageous. It assumes a $1,000 monthly benefit at a full retirement age of 66½.
| Total Benefits Collected | |||
|---|---|---|---|
| Age | Begin at 62 Reduced Monthly Benefit: $725 |
Begin at 66½ Monthly Benefit: $1,000 |
Begin at 70 Increased Monthly Benefit: $1,280 |
| 62 | $8,700 | ||
| 63 | $17,400 | ||
| 64 | $26,100 | ||
| 65 | $34,800 | ||
| 66 | $43,500 | ||
| 67 | $52,200 | $18,000 | |
| 68 | $60,900 | $30,000 | |
| 69 | $69,600 | $42,000 | |
| 70 | $78,300 | $54,000 | $15,360 |
| 71 | $87,000 | $66,000 | $30,720 |
| 72 | $95,700 | $78,000 | $46,080 |
| 73 | $104,400 | $90,000 | $61,440 |
| 74 | $113,100 | $102,000 | $76,800 |
| 75 | $121,800 | $114,000 | $92,160 |
| 76 | $130,500 | $126,000 | $107,520 |
| 77 | $139,200 | $138,000 | $122,880 |
| Collecting at 66½ produces greater total benefits than collecting at age 62 if you live to age 78 | |||
| 78 | $147,900 | $150,000 | $138,240 |
| 79 | $156,600 | $162,000 | $153,600 |
| 80 | $165,300 | $174,000 | $168,960 |
| 81 | $174,000 | $186,000 | $184,320 |
| Collecting at 70 produces greater total benefits than collecting at age 66½ if you live to age 82 | |||
| 82 | $182,700 | $198,000 | $199,680 |
| 83 | $191,400 | $210,000 | $215,040 |
| 84 | $200,100 | $222,000 | $230,400 |
| 85 | $208,800 | $234,000 | $245,760 |
Social Security benefits are adjusted to reflect any increase in the cost of living, measured by the Consumer Price Index, to ensure the purchasing power of Social Security benefits is not eroded by inflation. For simplicity, this example does not include any cost of living adjustments.
Source: SocialSecurity.gov, "Cost-of-Living Adjustment," 2017.
Facing A Possible Income Gap In Retirement
Social Security was created to promote the economic security of America’s workers. However, it’s important to understand that Social Security will only replace a portion of your pre-retirement earnings, leaving you with a potential income gap.
The amount of income that Social Security will replace depends heavily on your career income. The table below shows how Social Security replaces a greater percentage of income for modest earners versus higher earners
| Earnings Scale | Career-average Earnings | Annual Social Security Benefit | Percent of Career-average Earnings Replaced |
|---|---|---|---|
| Lower earnings | $23,308 | $12,348 | 53.3% |
| Medium earnings | $51,795 | $20,355 | 39.6% |
| Higher earnings | $82,872 | $26,971 | 32.8% |
| Maximum earnings | $127,061 | $32,875 | 26% |
Table assumes current-law scheduled benefits, and that hypothetical retirees turn 65 in 2020 and begin collecting benefits at age 65. For simplicity, example does not include tax adjustments.
Source: SocialSecurity.gov, "Replacement Rates For Hypothetical Retired Workers," April 2019.
Adding An Annuity To Fill The Income Gap
As you consider these various factors, you may find yourself wondering if your sources of income will last the rest of your life. If this is the case, an annuity may be an appropriate addition to your lineup of income vehicles. An annuity is a contract between you and an insurance company and is designed to protect and grow your money before providing a guaranteed stream of lifetime income. Here’s an example of how an annuity could be incorporated into your retirement income plan:
There are many different types of annuities to fit your unique goals for retirement. Some key benefits include:
- Principal protection to help keep your assets safe
- Growth potential to help you accumulate assets
- Tax-deferral for faster accumulation than taxable products
- Guaranteed lifetime income to help ensure peace of mind
Great American specializes in offering annuities that are easier to understand, helping you to achieve your goals with no surprises. Talk with your financial professional about how an annuity could fit into your retirement income plan.
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