• Financial Planning
  • Retirement Planning
  • Social Security Basics

    by William Reichenstein and William Meyer

    Social Security Basics Splash image

    This is the first in a series of three articles designed to help most people decide when to begin Social Security benefits.

    To simplify the discussion, we made several assumptions that would exclude some people. For example, we assume your Social Security benefits would not be affected by the earnings test, which is explained at the end of this article. We further assume you do not have children who would receive Social Security benefits based on your earnings record and you do not qualify for disability benefits. We further assume neither you nor your spouse receives a pension from work not covered by Social Security (e.g., public-school teachers, police officers, firefighters, and other government employees).

    There are many complex rules governing Social Security benefits that cannot be completely covered even in a series of three articles. However, we address four key points that will help you make an informed decision about when to claim benefits.

    The strategies discussed in this article, and in the forthcoming articles about claiming strategies as a single person and as a married couple, are based on the current promises of the Social Security system. Obviously, changes to this system need to be made. However, we join others who believe these changes will likely have little, if any, impact on current retirees and those approximately 55 or over. The U.S. Congress, however, can change benefit formulas at its discretion.

    Social Security Terms and Basics

    People who begin their retirement benefits at full retirement age (FRA), also referred to as normal retirement age, receive their full benefits—that is, their primary insurance amount (PIA). The full retirement age for individuals varies by year of birth. Social Security rules consider people to attain an age the day before their birthday. So, according to the Social Security Administration (SSA), someone born on January 1 has the same full retirement age as someone born on December 31 of the prior year. With the exception of this caveat, Table 1 presents the full retirement age by year of birth. The full retirement age is 66 for people born between 1943 and 1954, and it increases by two months per year thereafter. For someone born in 1960 or later, full retirement age is 67. (Unless otherwise stated, full retirement age denotes the full retirement age for your own retirement benefits and spousal benefits. There is a separate FRA for survivor’s benefits.)

    Someone who begins retirement benefits at full retirement age receives the primary insurance amount. Someone who begins these benefits before attaining full retirement age receives reduced benefits, while someone who delays these benefits until after full retirement age receives a higher level of benefits. Table 1 shows the reductions in retirement benefits for starting Social Security benefits before attaining full retirement age and the increase in benefits for delaying the start of benefits until after full retirement age.

    We discuss the reductions and increases for someone with a full retirement age of 66 because this affects most individuals who will be deciding when to begin Social Security benefits in the next several years. If this individual begins Social Security benefits before attaining full retirement age, the reduction is 5/9% per month for the first 36 months plus 5/12% per month for months 37 through 48. So, if retirement benefits are begun at age 62, 63, 64 or 65, the reduction is 25%, 20%, 13.33% and 6.67%, respectively, below the primary insurance amount. If benefits are begun at 64 years and six months, then the reduction is 10%, where this reduction is 18 months times 5/9% reduction per month.

    If benefits are begun after full retirement age, the increase is 2/3% per month for each month benefits are delayed until age 70. So, if benefits are begun at age 66 years and six months, 67, 68, 69 or 70, the increase in benefits—called delayed retirement credits—are 4%, 8%, 16%, 24% and 32%, respectively, above the primary insurance amount.

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    For someone with a full retirement age of 66 and a primary insurance amount of $1,000, the levels of monthly benefits if started at ages 62 through 70 would be: $750 at 62, $800 at 63, $866 at 64, $933 at 65, $1,000 at 66, $1,080 at 67, $1,160 at 68, $1,240 at 69 and $1,320 at 70. All payment amounts are adjusted for annual cost of living adjustments (COLA) and are rounded down to a whole dollar.

    The primary insurance amount is based on a detailed calculation using average indexed monthly earnings (AIME). AIME is the worker’s average monthly earnings for the 35 years of highest earnings, where earnings for years before age 60 are indexed to reflect increases in U.S. workers’ average wage level. For example, if the average wage level in the U.S. is twice as high when the worker is 60 than when the worker was 44, the formula doubles the age-44 earnings. If someone worked less than 35 years, the incomes are zero for the remainder of the 35 years. The maximum income for any year is equal to that year’s maximum income subject to Social Security taxes, which is $113,700 in 2013.

    This table shows the ages for receiving the primary insurance amount (PIA) at full retirement age (FRA) for your own and spousal benefits, as well as reductions and credits for early and delayed benefits.
          Age 62 Per Month Age 70
      Full   Benefit Delayed Benefit
    Year of Retirement Per Month Reduction to PIA If as % Retirement Credit as %
    Birth* Age Benefits Begin Prior to FRA** of PIA (%) of PIA
    1943-54 66 5/9% for 36 mos + 5/12%/mo 75 2/3 132
    1955 66 and 2 mos 5/9% for 36 mos + 5/12%/mo 74.17 2/3 130.67
    1956 66 and 4 mos 5/9% for 36 mos + 5/12%/mo 73.33 2/3 129.33
    1957 66 and 6 mos 5/9% for 36 mos + 5/12%/mo 72½ 2/3 128
    1958 66 and 8 mos 5/9% for 36 mos + 5/12%/mo 71.67 2/3 126.67
    1959 66 and 10 mos 5/9% for 36 mos + 5/12%/mo 70.83 2/3 125.33
    1960 or later 67 5/9% for 36 mos + 5/12%/mo 70 2/3 124
    *Social Security considers people born on January 1 to have been born in the prior year. 
    **The monthly reduction is 5/9% for the first 36 months prior to full retirement age, and 5/12% for every month after the first 36 months.

    Workers may receive increased benefits for work performed after beginning Social Security benefits. Each year, the Social Security Administration reviews the records for all recipients who work. If your latest year of earnings turns out to be one of your highest 35 years, the SSA refigures your benefit and pays you any increase due. This is an automatic process, and benefits are paid in December of the following year. For example, in December 2013, you should get an increase for your 2012 earnings if those earnings raised your benefits. The increase would be retroactive to January 2013.

    Getting an Estimate of Your PIA

    The information used to estimate your primary insurance amount is available from the online estimator at www.socialsecurity.gov/estimator. You will be asked to input your name and other identifying information. In addition, you will be asked for your estimate of earned income in the last year. To explain the information this estimate conveys, consider the following example for Joe:

    Assuming you continue to earn the same amount, if you

    • Wait to start your benefits at your full retirement age (66 years and 00 month(s) for you), your monthly benefit will be about...$2,180.00.
    • Delay starting your benefits until age 70, your monthly benefit will be about...$2,880.00.
    • Stop working at age 62 and start receiving Social Security benefits, your monthly benefit will be about...$1,623.00.

    Assumptions: We estimate your benefits using your average earnings over your working lifetime. If you worked last year, we will also assume that you will continue to work and make about the same amount as you entered for last year’s earnings.

    These estimates do not include:

    • Medicare premiums or other amounts that may be deducted from your benefit.
    • Any Social Security benefits you may be eligible for on the record of your current, divorced, or deceased former spouse.

    This estimate presents the levels of projected monthly benefits in today’s dollars if Joe were to begin benefits at age 62, at his full retirement age (66 in this example) or at age 70. These projections assume he will continue to earn his current level of inflation-adjusted income (or, at least, the maximum annual income subject to Social Security taxes) until benefits begin. All benefit levels are stated in today’s dollars. So, if cumulative inflation is 20% before benefits begin, the nominal payments will be 20% higher, but goods and services will also cost 20% more.

    To repeat, this estimate presents the levels of monthly benefits at various ages assuming Joe continues to work until the date that benefits begin. Suppose Joe plans to stop working at 62, and is deciding whether to begin benefits at 62, full retirement age (66) or 70. The $1,623 benefit level would be a good estimate of his benefits if begun at age 62. If he stops working at 62 but begins benefits at 66, he would get approximately $2,164 [$1,623/0.75, where 0.75 reflects the 25% benefit reduction for beginning benefits at age 62 from Table 1]. The $2,180 figure in the estimate for postponing retirement until age 66 is slightly higher than $2,164, which reflects the increase in benefits from continuing to work. Similarly, if he stops working at 62 but begins benefits at 70, he would get approximately $2,856 [$2,164 x 1.32, where 1.32 reflects the 32% delayed retirement credit for delaying benefits from 66 to 70 from Table 1]. The $2,880 benefit for delaying retirement until age 70 is slightly higher than $2,856, which reflects the increase in benefits from continuing to work from age 62 to 70.

    In general, the projected benefit level of $2,180 at full retirement age is a good estimate of the primary insurance amount. As noted, it may be a bit too high if Joe plans to quit work before his full retirement age. Potentially of more concern is the fact that this estimate provides no guidance about reductions in benefits for workers who will receive a pension from work not covered by Social Security. In brief, the estimate may substantially overstate the benefits received by someone who receives a pension from work not covered by Social Security taxes.

    The Earnings Test

    Monthly Social Security benefits may be reduced or eliminated due to the earnings test, which applies to individuals who begin receiving payments before reaching full retirement age. In the years before reaching FRA, Social Security benefits are reduced by $1 for every $2 of earned income above $15,120 (in 2013). In the year someone reaches full retirement age, benefits may be reduced by $1 for every $3 of earned income above $40,080 (in 2013). After reaching full retirement age, individuals can receive full benefits with no limit on earnings.

    Benefits lost due to the earnings test are not necessarily permanently lost. Suppose Ken begins receiving Social Security benefits of $800 a month in January 2013 at age 62. He told the Social Security Administration that he expects to earn $19,000 in 2013, which is $3,880 over the $15,120 limit. Social Security would withhold $1,940 ($1 for every $2 earned over the limit). To do this, Social Security Administration would withhold all benefit payments from January 2013 through March 2013. Beginning in April 2013, Ken would receive his $800 monthly benefit and this amount would be paid each month for the rest of the year. In January 2014, he would be paid the additional $460 withheld in March 2013.

    Continuing with the prior example, suppose Ken lost all or part of three months’ benefits for four years before he reached full retirement age. When he reaches FRA, his benefits will be adjusted as if he began Social Security benefits 12 months after he actually began his benefits. If Ken lives to an average life expectancy of about 80 years, the increase in benefits at his full retirement age will approximately make up for the benefits lost due to the earnings test. For more information on the earnings test, see “How Work Affects Your Benefits,” www.socialsecurity.gov/pubs/10069.html, or our book, “Social Security Strategies” (2011).

    Up Next in This Series

    In the next two articles, we will discuss strategies for claiming Social Security benefits for those who are single and those who are married.

    William Reichenstein , CFA, holds the Pat and Thomas R. Powers Chair in Investment Management at Baylor University and is head of research at Social Security Solutions, Inc .
    William Meyer is founder and CEO of Social Security Solutions Inc., a service that provides personalized recommendations as to when to claim Social Security benefits.


    Jeff Ryan from IL posted over 3 years ago:

    So here's a question: If you're eligible for Social Security benefits based on having worked full-time for a significant number of years, will pension payments from a pension plan for part-time work (as an adjunct faculty member at a community college) reduce your Social Security benefits? The pension payments were never based on full-time work.


    Charles Rotblut from IL posted over 3 years ago:


    Here is what the Social Security Administration says on their website:

    If your pension is from work where you paid Social Security taxes, it will not affect the amount of your Social Security benefit. However, if any part of your pension is from work where you did not pay Social Security taxes, it could affect the amount of your Social Security benefit.



    Bruce from GA posted over 3 years ago:

    Because I have been unemployed for the past several months and not being able secure another job quickly, I decided to start receiving social security at age 62 and 6 months. If I should happen to get a new well paying full-time job and hopefully, work up to 75, can I stop drawing social security and pay back what I have received and postpone receiving social security when I retire again? Also, I have about a 70% loss of hearing in each ear (been losing hearing since an early age - not job nor injury related), but hearing loss may prevent me from working as a chaplain or pastor in the future. Would my current or future hearing loss quality me currently or in future for disability social security?

    Roger Malone from OR posted over 3 years ago:

    I turn 66 on March 4th of 2014. If SSA says I will receive approximately $1750 per month then, is there any way to boost the payments beyond that amount still starting on March 4th of 2014?

    Ken Milder from NM posted over 3 years ago:

    For Bruce from Mississippi: Yes, you can return to work and stop your Social Security income payments. This will improve your benefit amount when you decide to fully retire in the future. Each case is unique, so you'll need to contact your Social Security office. Also see .

    For Roger Malone: I believe you are referring to Supplemental Social Security Income. See .

    Ken Milder from NM posted over 3 years ago:

    For Bruce and Roger, the URLs for information on the Social Security website were stripped from my previous post. They were to pages about "Returning to Work" and "Understanding Supplemental Social Security Income." Find the site and do a search.

    Tim from ND posted over 3 years ago:

    If I started drawing my Social Security at 62; but, know I made a mistake is it possible for me to pay the money back to the SSA and wait until I am 70 years old?

    C Arnold from TX posted over 3 years ago:

    I look forward to the next articles in this series since I've often found William Reichenstein's articles informative. I hope he addresses the time value of money in his recommendations on strategy for timing benefits.

    In many other articles, this is ignored and the recommendation is to delay since the dollar amount one will receive per month is higher. But when I've done the calculations of present value of an income stream starting at age 62 versus a higher income stream starting at age 66 versus a still higher income stream starting at age 70 - I haven't found much difference in present value, which makes me think the government actuaries knew what they were doing. Of course it will depend on the longevity and discount rates one assumes, and trying to factor in future cost of living adjustments to benefits will complicate it further.

    Rick from ND posted over 3 years ago:

    Very interesting information, but you totally lost me when you starting talking about AIME. If I retire at age 61 (with no further earnings) but don't start drawing until age 66, how can I calculate what my estimate of PIA will be at age 66? There needs to be a simple way to figure this out because this affects planning for the future. Did I miss something in this article or is it that difficult to find out?

    Charles Rotblut from IL posted over 3 years ago:


    The Social Security Administration has a retirement estimate tool that may help

    T. Rowe Price also has a useful tool at:

    If you need something more customized then you may want to consider a premium service such as the authors service, Social Security Solutions

    I hope this helps,

    Tim from ND posted over 3 years ago:

    I started drawing my Social Security at the age of 62,which was a mistake. I am now 68 and would like to pay all the money back to Social Security and wait until I am 70 to draw my Social Security. Is that possible?

    Scott Brown from GA posted over 3 years ago:

    I am self employed as a business owner and am 62 years old. I intend to retire at FRA (66) and have recently increased the salary I am paid from my business. If I continue to pay myself that increased salary until I retire (in about 4 more years), will that help increase the benefit payment I will get when I retire at FRA?

    Mike S. from IL posted over 3 years ago:

    Rick from N. Dakota (and others):

    Yep, I think the actuaries did their homework. No matter when you file and claim benefits, you're going to net about the same amount drawn over your lifetime. If you want to provide for a spouse who never worked and may be expected to outlive you by a lot, then waiting until age 70 makes sense. Otherwise, it's more of a fun problem to see how much you can squeeze from the system's complex rules.

    Check out Tom Margenau's "Social Security and You" columns, which you can find on creators.com. He is a retired SSA guy who knows the rules, answers questions (for free), and offers an interesting contrarian view to Reichenstein and others who want us to "optimize" our draw from social security.

    Richard Abbott from FL posted over 3 years ago:

    I started my social security at 62 and never had any regrets doing do. I am 83 years old now and still ahead financially by starting collecting my S/S at age 62. The reason being I did not have to touch my IRA account for money until 70&1/2. My IRA made a lot more money for me than S/S would have PAID ME. Plus I didn't pay any income taxes on my IRA until I was required to start withdrawing because of RMD under the IRS rules at age 70&1/2.

    John Griffin from TX posted over 3 years ago:

    Will my wife, who earns as much as I do, get the same amount of money at 70 as I will at age 70?

    Bob Davis from IL posted over 3 years ago:

    If I take social security benefits at 62, and my wife takes her spousal benefit at 62, will her benefit be one half of mine, or is her benefit reduced by a greater amount.

    David Fischer from TX posted over 2 years ago:

    Can someone provide a link to a useful tool, to calculate the present value of an existing pension payment? I’ve tried several tools, to little benefit and still have no calculated current value. In reference to comments by C Arnold from Texas above, I wish to obtain a current value for financial-planning purposes and in determining my SS election choice. D Fischer, Texas

    Roger Oesterling from Florida posted over 2 years ago:

    I have paid into Social Security from 1954 until I retired at age 65 in 2007. I married a British citizen in 2005. Will she be able to collect my Social Security benefits after I pass on?

    Melinda Reach from ME posted over 2 years ago:

    Will my husband's maximum spousal benefit increase if I delay filing until 70 vs. full retirement age? If i die, will his maximum benefit be based on my benefit taken at 70 vs. 66?

    Charlie from Colorado posted over 2 years ago:

    My fiancée soon turns 62 and has contributed to Social Security, as an independent consultant her whole working life. If she starts drawing at age 62 and then we marry in a few years, will she be locked in to her initial benefit draw or can she then switch over to drawing spousal benefits based on my contributions, which were much, much larger?

    Charles Rotblut from IL posted over 2 years ago:


    The Social Security Administration has a page devoted to spousal benefits. If the links on this page do not answer your questions, I suggest contacting an advisor who is well-versed on Social Security benefits (many financial advisors are not).


    Doug from CA posted over 2 years ago:

    By retiring at age 63 1/2 I will receive about 154K in benefits by the time I'm 70 years of age. The additional SSA benefit at age 70 puts break even at about age 83. As a group of investors I'm surprised that anyone would pass on taking the money prior to turning 70. Considering the rule of 7.2% just imagine how much further back you could push the break even point.

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