When to Start Receiving Social Security Retirement Benefits

Understanding Your Social Security Retirement Benefits, Including When to Start Receiving Them

Edward A. Zurndorfer

The earliest age an individual can receive monthly Social Security retirement benefits is age 62. However, if an individual elects to receive his or her benefit before his or her full retirement age (FRA), the retirement benefit will be reduced for each month before his or her FRA the individual starts receiving the retirement benefit. FRA depends on which year an individual was born, and is summarized in the following table:

Full Retirement Age (FRA) by Year of Birth

*Source: www.socialsecurity.gov

The reduction is a permanent reduction and continues even after the individual reaches his or her FRA.

An individual who starts receiving a Social Security retirement at his or her FRA will receive his or her full benefit amount. Individuals who choose to delay receiving their Social Security retirement benefit beyond their FRA may be eligible for delayed retirement credits, which permanently increases an individual’s Social Security retirement benefit.

Before discussing when an individual should elect to start receiving his or her Social Security retirement benefit, it is important to review some of the basics of Social Security retirement benefits and in particular how Federal employees qualify for benefits.

To qualify for a Social Security retirement benefit, an individual must be “fully insured”. An insured status is acquired by earning “credits,” based on the wages or self-employment income earned during a calendar year. In 2020, an individual must earn $1,410 in Social Security-covered employment (for example, a federal employee covered by FERS) in order to earn one credit and earn $5,640 to earn the maximum of four credits for the year. An individual generally becomes “fully insured” by earning 40 credits of Social Security, typically by working 10 years in Social Security-covered employment.

In general, a fully insured individual’s Social Security retirement benefit, and those of his or her family members (which will be discussed in the next FEDZONE column) are based on the individual’s Social Security earnings record. The earnings taken into account are reported on an individual’s W-2 (Box 3 -Social Security wages) to the Social Security Administration (SSA) each year by the individual’s employer, up to a certain maximum known as the “wage base.”

The wage base is indexed for inflation each year and effectively places a cap on the amount of Social Security benefits a worker can receive, regardless of earnings. The wage base for 2020 is $137,700 while the wage base for 2019 was $132,900.

Using an individual’s Social Security-covered earnings record, the SSA calculates a number known as the Primary Insurance Amount, or PIA. The PIA is the basic value used to determine the dollar amount of benefits available to an individual and his or her family.

Early Retirement

Fully insured individuals can take their monthly retirement benefits, also called “old-age insurance” benefits, when they are age 62 or older and have filed an application for those benefits. But by starting to receive the retirement benefit sometime before the month a fully insured individual becomes FRA, the benefit will be permanently reduced. The amount of the reduction is presented in a table below.

If a fully insured individual waits until his or her FRA to start receiving his or her retirement benefit, then the full retirement benefit will be paid.

Delaying Benefits

If a fully insured individual elects not to start receiving his or her Social Security retirement benefit at his or her FRA or early, but rather delays the start of the benefit, then delayed retirement credits will permanently increase the retirement benefit. Delayed retirement credit (DRC) increases apply for benefits for each month an individual is older than FRA but younger than the month he or she turns age 70. An “increment month” is any month an individual is eligible, but did not receive a retirement benefit.

The DRC amount is based on increment months which may increase an individual’s retirement by varying amounts, depending on when he or she reaches FRA.

The per month reductions (by percentage) of Social Security retirement benefits that are started before one’s FRA, and the annual DRC increases (by percentage) are summarized in the following table:

*Source: www.socialsecurity.gov

The following is a sample of an individual’s overall Social Security benefits (retirement, family, disability and survivors) as computed by the SSA for each working individual each year. Individuals can set up their own SSA account by going to www.socialsecurity.gov/myaccount. In so doing, an individual can download and view his or her overall Social Security benefits (in today’s dollars) at any time.

What is the Best Age for an Individual to Start Receiving their Social Security Retirement Benefit?

The question of when (that is, at what age) an individual should start receiving his or her Social Security retirement benefit has been asked an immeasurable number of times. Unfortunately, there is in reality no one answer to this question that applies to every individual. Some of the issues that are relevant to answering the questions: (1)Does the individual need the Social Security income to help pay his or her bills? (2) Is the individual married and if so, are half of the spouse’s Social Security retirement benefit more than the individual’s Social Security retirement benefit? (3) Would any family member (spouse, children under the age of 18) benefit by the individuals starting to receive the benefit? (family Social Security benefits will be discussed in a subsequent column); (4) Is the individual under FRA and still working? Those individuals under FRA and still working may have their Social Security benefits reduced – perhaps entirely- if their salary/wages are too high; and (5) How is the individual’s health? If an individual in his or her early 60’s and not in the best of health, it probably does not make sense to delay the start of one’s Social Security retirement benefit.

The following examples illustrate the difference between electing permanently reduced retirement benefits at age 62 or waiting until one’s FRA or until age 70. For each illustration, the examples do not project any future cost-of-living allowances (COLAs).

The first two examples: Start receiving Social Security benefits at age 62 or at FRA?

Example 1 – FRA 66 (born 1943-1954)

Primary Insurance Amount                                    $1,500

Monthly benefit at FRA                                        $1,500

Monthly benefit at age 62                                       $1,125

(48 months before FRA; 25 percent reduction)

$1,125/month x 48 months = $54,000

(initial advantage of starting benefit at age 62)

$54,000/*$375 = 144 months or 12 years

(*permanent reduction by starting benefit at age 62)

The initial advantage continues until age 78 (66 + 12 years), which is the breakeven age for total lifetime benefits. In other words, if the individual starts receiving the benefit at age 62 but dies before age 78, then the individual comes out ahead. If the individual dies after age 78, then the individual made the wrong decision to start receiving his or her Social Security benefit at age 62.

Example 2 – FRA 67 (born after 1959)

Primary Insurance Amount                                    $1,500

Monthly benefit at FRA                                        $1,500

Monthly benefit at age 62                                      $1,050

(60 months before FRA; 30 percent reduction)

$1,050/month x 60 months = $63,000

(initial advantage of starting benefit at age 62)

$63,000/*$450 = 140 months or 11 years and 8 months

(*permanent reduction by starting benefit at age 62)

The initial advantage continues until age 78 and 8 months (67 + 11 years and 8 months) which is the break-even age for total lifetime benefits. In other words, if the individual starts receiving the benefit at age 62 but dies before age 78 years and 8 months, then the individual comes out ahead. If the individual dies after age 78 years and 8 months, then the individual made the wrong decision to start receiving his or her Social Security benefit at age 62.

Next two examples: Start taking Social Security benefits at FRA or wait until age 70?

Example 1- FRA 66 (born 1943-1954)

Monthly benefit at FRA                                        $2,861

Month benefit at age 70                                         $3,776

(4 years x 8 percent/year DRC =32 percent increase of $915)

$2,861/month x 48 months = $137,328 accrued benefits at age 70

$137,328/$915 = 150 months = 12.5 years

The initial advantage of starting to take Social Security benefits at age 66 stops at age 70 plus 12.5 years, or 82.5 years. If the individual lives to at least age 82.5, then the decision to start receiving retirement benefits at age 70 was the correct decision. 

“Breakeven” age is age 82.5

Example 2 – FRA 67 (born after 1959)

Monthly benefit at FRA                                        $2,861

Monthly benefit at age 70                                      $3,548

(3 years x 8 months/year DRC = 24 percent increase of $687)

$2,861/months x 36 months = $102,996 accrued benefits at age 70

$102,996/$687 = 150 months = 12.5 years

The initial advantage of starting to take Social Security benefits at age 67 stops at age 70 plus 12.5 years, or 82.5 years. Same conclusion as above.

“Breakeven” age is age 82.5

Some Other Items Related to an Individual’s Social Security Retirement Benefit:

1. An individual’s PIA is adjusted annually by changes in the national indexing average wage. To the resulting PIA, cost-of-living adjustments (COLAs) when the year age 62 is attained and all subsequent years are applied. The 2021 COLA was 1.3 percent, the COLA benefit increases become effective beginning with December of the prior year. For example, the 1.3 percent COLA applied to individuals receiving Social Security retirement benefits as of Dec.1, 2020.
2. Those individuals who are receiving a government (Federal, state or local)-sponsored pension in which they did not contribute to Social Security (for example, a CSRS annuitant) will most likely have their Social Security benefits reduced as a result of the Windfall Elimination Provision (WEP). The amount of reduction depends on the individual’s years of “substantial” Social Security wages.
3. An individual who is receiving a Social Security retirement benefit but who continues to work in Social Security-covered employment will have his or her PIA automatically recomputed each year by the SSA. The result will be a higher monthly benefit retroactive to the beginning of that year. The reason is that the SSA computes the PIA based on an individual’s highest 35 years of Social Security wages. Since wages earned currently will likely be larger than wages earned 35 years ago, the PIA will be larger, leading to a larger Social Security retirement benefit that year.

Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

When to take Social Security Benefits