Dana Ronald Contributor
Determining your expected social security income is critical to setting a retirement date. Anyone planning on retirement will need to be aware that delaying your application for social security benefits until you’re 70 can result in a larger monthly payout.
1. Your 35 Highest-Earning Years
Total up what you earned in your highest 35 years of income and divide it by 35. This gives you your AIME or average indexed monthly earnings. Depending on the year you retire, this dollar amount will be run against two bend points or primary insurance amount allotments. For 2020, the lowest bend point is $960 and the highest is $5,785. The PIA formula is the sum of
- 90% of the first $960
- 32% of the difference between $960 and below $5,785, and
- 15% of the amount above $5,785
Bend points change year by year and will change your benefit amount.
2. A Quicker Option
The SS Quick Calculator won’t take that much detail, but the numbers coming back will be rough. For example, if you took years away from paid employment to care for family, be aware that this calculator only includes one year’s earnings, so your numbers may look different.
If you choose to enter a phased retirement and are only collecting part-time income, be aware that this calculator relies on your final year of wages, so again, this estimate may be inaccurate.
3. Consider Spouse’s Benefits
If you are a surviving spouse and your spouse was eligible for social security benefits, make sure to check their benefit payout in comparison to yours. If you meet the requirements, your income limitations may not have as much bearing on your social security benefits.
Use the Benefit Eligibility Screening Tool to determine if your social security income can be replaced with spousal benefits. For many women who spent their working life doing the unpaid work of caring for children and running a household, access to spousal benefits can be crucial to enjoying a more comfortable retirement.
If you have retirement savings beyond social security and your spouse is older, keep an eye on Required Minimum Distribution, or RMD, penalties. The penalties for not taking the RMD by the deadline, which was initially set at 70 1/2, are severe. These regulations keep changing, and COVID has altered penalties and restrictions for both early and late retirement withdrawals.
For those planning to take out retirement savings early, keep an eye on the clock. Yes, you can withdraw without facing the 10% penalty, but you will have to pay income taxes on distributions. Additionally, if you don’t have the time to build the funds back up or have the resources to pay the money back over the next three years, your retirement future could look a lot grimmer.
4. Review the Delayed Benefit
Carefully study the difference between what you’ll collect on a monthly basis if you take your benefits at 62 vs. 67 or 70. For example, simple calculations indicate that someone earning $50,000 in 2020 who retires at 62 will be eligible for $1,115.00 per month. If they wait until 65, they’ll receive $1,417.00 per month. Two more years and collecting at the age of 67 will bring in $1,667 per month and waiting until 70 will bring in over $2,100 per month. If you have a chance at living to 80, bringing in over $1,000 each month for those ten years could be the difference between just surviving and thriving.
Each person is different and none of us can be completely sure of our life expectancies, our employment options or our eventual capacities. The calculations in the above paragraph were done using the Social Security Quick Calculator, so while the comparison is accurate, the numbers are certainly not set in stone. Every year will bring changes to the bend points and inflation is always a concern. That being said, each person must do their homework before submitting their application for social security.
Careful review of your personal health situation, your retirement goals and your family’s needs will need to be undertaken to make the best decisions about your social security start date. If you must start at 62 or face extreme financial difficulty, do so. If your spouse has passed away and the spousal benefits are enough to live on, check out your ability to earn some money while collecting social security benefits and enjoy a phased retirement.
The views, claims, and opinions expressed by our contributors are their own, and do not necessarily represent those of RSSA or NARSSA.