Why “Full Retirement Age” Is Not a Magic Date
For years when you would open your Social Security estimate, there would be a big number in the top right corner – the amount per month you were estimated to get at “full retirement age” (FRA).
There was a tremendous focus on this specific age, which resulted in many people assuming that was the ideal date to claim benefits. Before I dispel this myth, let me list some of the features of the system that are tied to your FRA.
1 – Spousal benefits. If your spouse’s benefit is less than 50% of your benefit at FRA, they will get a spouse's benefit. You cannot increase the spousal benefit by waiting beyond FRA, only your own benefit.
2 – Earnings limit. Prior to FRA, if you worked a job and collected Social Security, your benefit would be reduced if you earned over a dollar limit. That earnings test goes away after FRA so you are free to collect a benefit and also earn as much as you want in a job.
When we put aside these features and focus solely on maximizing an individual's lifetime benefit, there is more benefit to waiting during the period between FRA and age 70 than there is prior to FRA.
If your FRA is age 67, there is a 30% reduction for claiming at age 62. While the months between ages 62 and 64 are not penalized as much as the months between 64 to 67, it averages out to about a .5% per month (or 6% per year) reduction.
Then, once you reach your FRA, your benefit grows at a larger rate of .667% per month or 8% per year.
Social Security Intelligence
Put another way, your FRA is the age at which your benefit growth rate is increased from .556% per month to .667% per month. So, why is everyone in a rush to take benefits and stop that growth as soon as this rate has increased?
To start, I think the language used by Social Security points retirees toward claiming at FRA as you have your “benefit reduced” for taking it prior to FRA and you earn “delayed retirement credits” by waiting beyond FRA. Since most people hate the feeling of losing more than they enjoy the feeling of gaining, taking benefits at FRA feels right.
I prefer to calculate my clients’ age 70 benefit and then work backward from there, which makes us face the fact that we are accepting a reduced benefit for claiming any benefit prior to 70. While claiming before 70 still makes sense for plenty of people, I think this is the most rational way to look at your benefit decision.
Happy Planning,
Alex
This blog post is not advice. Please read disclaimers.