With retirement just around the corner, a solid understanding of Social Security retirement income benefits is essential. It's important to be aware of the full retirement age, delayed retirement credits, primary insurance amounts, earnings history, early withdrawal age, and accompanying penalty. To help you make the most of your Social Security savings and maximize your long-term financial goals, it’s important to understand these key factors.

Full Retirement Age (FRA)

Your full retirement age (FRA) is the age at which you'll receive 100% of your Social Security benefits. FRA differs from individual to individual depending on when they were born. Those born between 1943 and 1954 have an FRA of 66. The FRA for those born in 1960 or later is 67. The chart below outlines each birth year's corresponding FRA:

Birth Year           Full Retirement Age

1954 and earlier    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

Primary Insurance Amount (PIA)

Your Primary Insurance Amount (PIA) is the amount that determines how much money you receive when taking Social Security benefits. It’s based on 35 years of earnings history with any zeros removed from consideration and adjusted for inflation each year by the government. If a person has worked for more than 35 years, only their highest-earning 35 years are used in calculating their PIA; any lower-earning years are ignored. The PIA is used as a base in calculating your actual monthly benefit amount, which depends on when you start collecting benefits relative to your FRA as shown above.

Delayed Retirement Credit (DRC)

If you opt to delay taking your Social Security benefits until after reaching your FRA, there are some advantages. When you wait until after your FRA, you can earn an additional 8% per year up until you reach 70 years old—this additional benefit is known as the Delayed Retirement Credit (DRC). This means if you wait until 70 years old to begin collecting Social Security benefits, you will receive 124% of what would have been paid at the full retirement age of 67 or 132% if your FRA is age 66.

Earnings History

Your earnings history plays an important role in determining how much money you get from Social Security benefits each month. The earnings history will provide a snapshot of how much wages were earned over time by looking at both taxable earnings as well as any non-taxable wages, such as those paid into Social Security or Medicare taxes but not taxed on income tax returns due to deductions like 401(k) contributions. This means it’s important to ensure that your highest earning years are recorded accurately so that any discrepancies can be addressed beforehand.

Early Withdrawal Penalty

Taking early withdrawals from your Social Security account may be tempting but should be done with caution, as there can be significant drawbacks, such as tax implications or reducing future potential benefits. If you choose to withdraw benefits prior to reaching your full retirement age (FRA), there is a penalty that decreases the amount of benefits available by 5/9 of 1% per month for 36 months preceding FRA. If you claim your benefit more than 36 months before your FRA, then the benefit is further reduced 5/12 of 1% per month until age 62. The earliest age the Social Security retirement income benefit may be claimed is 62 unless one qualifies for specific exceptions, such as disability or survivor’s benefits in which case this penalty does not apply.

Conclusion

Understanding all aspects of Social Security can seem like a daunting task, but you can trust that the advisors at Provident Financial Planning know the details to make sure that your retirement income plan is well-thought out and optimized for maximum potential results. From understanding the details surrounding the full retirement age, Delayed Retirement Credit, Primary Insurance Amount, and earnings history—as well as early withdrawal options—being educated about these nuances can ultimately lead to better outcomes during one's golden years! You can discuss this information with a Provident Financial Planning CFP® and CPA/JD tax advisor along with your other financial details before making any decisions regarding Social Security withdrawals, so that you can make the most informed financial decisions.

Make an appointment for a free consultation with the Provident Financial Planning team of experts today!

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Blessings,  

Paul S. Michel, CFP®

paul@providentfp.com

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