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What Every Investor Should Know About Planning And Saving For Retirement
I’m going to be talking about When To Collect Social Security Benefits.
Before I get into that I want to talk about a couple of basic terms and definitions that you should know about before getting too much into the Social Security benefits. The first one is called the Full Retirement Age. So, this is the age that you get to where you’re eligible for your full Social Security benefit. And over the past couple of decades or so, Social Security administration has been slowly changing this full retirement age. For example when Social Security first started, the full retirement age was age 65. That’s for people that were born before 1937.
If you were born between 1938 and 1942, the full retirement age is age 65 plus they add two months for every year between years 1938 to 1942.
Most of the people probably watching this video are going to have a full retirement age that’s either going to be 66 or 67 or somewhere in between.
So your full retirement age is age 66 if you were born between 1943 and 1954. Between 1955 and 1959, similarly they’re going to add two months for every year in between those years to 1960. For anybody who was born after 1960, your full retirement age is age 67.
The 2nd term that I want to talk about is what’s known as your Primary Insurance Amount. Sometimes I abbreviate this, or a lot of people abbreviate it as your PIA. And your Primary Insurance Amount is the amount of Social Security benefit that you’re eligible for at your full retirement age.
As you probably know, you’re eligible to collect Social Security benefits early if you want, as early as age 62. Or you could delay your Social Security benefits to as late as age 70, earning what are known as delayed retirement credits. So we’re going to assume for this example right here, that your full retirement age is age 66, that’s the age that you’re eligible for 100% of your full retirement age, Primary Insurance Amount.
If you collect as early as age 62, you’re going to be eligible for 75% of your benefit and then if you delay benefits past your full retirement age, you’re going to get an 8% delayed retirement credit for every year that you delay past age 66. All the way up to 132% that you’d be eligible for at your Primary Insurance Amount.
So let’s talk about this a little bit in terms of some benefits. So let’s say that your Primary Insurance Amount is $2,000 a month. If you collect at 62, you collect early, you’re going to get 75% of that. So to give you some idea there. You would be eligible for $1,500 a month. And if you waited until age 70, you’re actually going to get $2,680 per month, which is 132% of that $2,000 a month benefit.
So one of the things that many of you may want to calculate as you’re trying to decide when to collect Social Security is, to calculate your break even period. And to do this we’re going to just do some pretty simple math and we’re going to say okay, if I collect Social Security at age 62, versus age 66, how many years do I have to wait, or collect benefits after age 66 to essentially make up for the fact that I didn’t begin collecting at age 62.
So let’s do some math here. $1,500 times 12 months a year means that your Social Security benefit is going to be $18,000 per year. We’re going to collect that benefit for four years. So that’s going to work out to be $72,000 in Social Security benefits that you would collect from age 62 until your full retirement age at age 66. And one thing here, we’re going to keep this pretty simple. I’m not going to include any cost of living adjustments in any of these examples, just to keep our numbers pretty simple.
So the way we would calculate your break even is we would take that $72,000 that you’re going to be collecting before your full retirement age, and we’re going to simply divide that by 500, which is the difference, the extra benefit that you’re going to get at age 66, by delaying that. So dividing $72,000 by $500 works out to be 144 months that you would have to live essentially and collect that primary insurance of $2000 a month. So obviously divide that by 12. That tells you that your break even period for that is actually 12 years.
So let’s talk about a couple of reasons why we would take Social Security benefits early versus why would we delay taking Social Security benefits. Number one is that you are getting that full, un-reduced Social Security benefit at your full retirement age. The other thing is, we’re going to talk about this in another video, but there are some earning limitations. So if you begin collecting Social Security before your full retirement age, for 2017 as an example, you can only earn $16,920 before your Social Security benefits began getting reduced, because of the working earnings test. So that’s the 2nd reason, and then the 3rd reason that we want to wait, possibly to after our full retirement age to begin collecting benefits is because some other filing strategies may be available, and especially for married couples, there may be some opportunity to coordinate your benefits between yourself and your spouse, to really, hopefully maximize that social security benefits.
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