Friday, May 6, 2022

How To Calculate Social Security Benefits At Age 62

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Social Security Calculation Step : Adjust All Earnings For Inflation

How to Easily Calculate Your Social Security Benefit for Any Age Between 62 & 70

So lets jump in with calculating your AIME. To do this, youll need to get use a notepad or a tool like Excel/Google Sheets.

Youre going to need six individual columns with plenty of room underneath for your information. Set up your columns with the following headings: Year, Age, Actual Earnings, Indexing Factor, Indexed Earnings, Highest 35 Years.

The first two headings are the year and your age. Go all the way back to the first year you had earnings that were taxed for Social Security. You can find a complete record of this by going to your online SSA account and click the link that says view earnings record. If you dont have an online account, its very easy to set one up.

This may seem a little redundant to put the year and your age, but itll make another step a little easier.

Now you just need to copy down the information from the SS earnings history. Youll want to use the part that says your taxed Social Security earnings. Dont skip a year, even if there were no earnings. Just put a zero in.

Once you have all of your historical earnings recorded, its time to adjust them for inflation. The SSA uses an indexing factor to make sure your future benefit has kept up with inflation, but still based on your earnings.

Important note hereonly your earnings through age 59 are indexed. All earnings at age 60 and beyond are used in the calculation at face value with no inflation adjustment applied.

Two Schools Of Thought About When To Take Social Security Retirement Benefits

Ive been reading about this topic and sense that there are two schools of thought in regard to the start of Social Security: 1) delay paychecks as long as possible using any means possible to get the highest monthly benefit unless youre nearly certain youre gonna die before full retirement age or 2) it depends.

Im in the it depends camp. Thats because, personal situations vary widely. In addition, economic conditions often change, making a good choice in one scenario look more or less attractive in another situation.

For example, right now, earning more than 1-2% annually risk-free seems impossible. But if the economy changes and I could earn 5% per year in an FDIC-insured savings account, then starting my paycheck at full retirement may be better than delaying. On the other hand, if market returns are likely to stagnate or turn negative , then it could make sense to wait.

Or, if I needed to take on high-interest debt in order to pay my bills in my sixties, then it may make sense to start receiving paychecks earlier rather than later. Fortunately, I dont anticipate this situation. But my point is that the Social Security decision is related to other aspects of my financial life and investment opportunities.

Your Social Security Benefit Isnt Always Based On 35 Years Of Work History

Have you ever wondered how the Social Security Administration calculates your benefits? We have countless resources on this site that explain the various formulas, rules, and exceptions if youre curious.

But we havent discussed one big exception to the main calculation for arriving at your Social Security income amount, and that is the fact that the Administration doesnt always use all of your years of historical earnings to figure your benefit.

Instead, they only use the years designated as computation years, This refers to the number of earnings years used to calculate your Social Security benefit and its why even if youve worked for at least 35 years, not all of those years may be included in the average.

Using 35 Years of Work History Is a General Rule But Its Not Always Used to Figure Your Social Security Benefits

How many computation years the Administration uses can be a point of confusion. Some have mistakenly thought its the three highest-earning years of your working career, or the highest five years.

This isnt true when it comes to Social Security, although its a common measure for many pension calculations.

Another common perception is that the Social Security Administration will take 35 of your highest-earning years and get an average earnings level from those numbers. And while that is the general rule, its not always 35 years thats used in the calculation.

How Social Security Retirement Benefits Are Calculated


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How Does Social Security Calculate Your Age

We base Social Security benefits on your lifetime earnings. We adjust or index your actual earnings to account for changes in average wages since the year the earnings were received. Then, Social Security calculates your average indexed monthly earnings during the 35 years in which you earned the most.

When Can You Claim Social Security

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You can claim benefits as early as 62. However, the full retirement age is 66 if youre born between 1943 and 1954. For those born between 1955 and 1960, the retirement age increases gradually until it reaches 67.

Those who claim Social Security benefits early will see smaller monthly checks. If you file for benefits before 66 or 67, you could see a permanent reduction of 25-30% of your benefits. On the other hand, if you can delay claiming benefits until youre 70, your checks could be as much as 32% higher.

Besides, delaying filing for Social Security benefits can reduce your taxable income early in retirement. Its a strategy worth considering if you want to withdraw more from qualified accounts without shouldering a heavy tax burden.

Careful Social Security planning is crucial if youd like to have the option of delaying benefits. Using a combination of the following strategies can allow you to live comfortably until you want to claim your benefits:

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What About Unmarried Children

An unmarried child of the deceased may be able to receive benefits if one of the following applies:

  • They are younger than 18 years of age or, they are up to age 19, if they are a full-time student in an elementary or secondary school.
  • They are age 18 or older with a disability that began before the age of 22.

How Much Can I Earn If I Retire At 62 In 2021

In 2021, a person younger than full retirement age for the entire year is considered retired if monthly earnings are $1,580 or less. For example, John Smith retires at age 62 on October 30, 2021. He will earn $45,000 through October. He takes a part-time job beginning in November earning $500 per month.

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When A Spouse Dies

When one spouse dies, the surviving spouse is entitled to receive the higher of their own benefit or their deceased spouses benefit. Thats why financial planners often advise the higher-earning spouse to delay claiming. If the higher-earning spouse dies first, then the surviving, lower-earning spouse will receive a larger Social Security check for life.

When the surviving spouse hasnt reached their FRA, they will be entitled to prorated amounts starting at age 60. Once at their FRA, the surviving spouse is entitled to 100% of the deceased spouses benefit or their own benefit, whichever is higher.

Calculating Your Average Indexed Monthly Earnings

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List your every year income. Your Social Security advantage is primarily based totally on your common listed month-to-month income . You can calculate this with the aid of using searching at your annual profits every 12 months. Make positive you best consist of the part of your profits that became difficulty to Social Security tax.

  • Your protected profits consist of profits from employment for that you have been paid an hourly salary or salary, plus self-employment profits.
  • The simplest manner to get the facts you want is to installation an account on-line with the SSA. From there you may get your Social Security declaration and affirm your income.

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How A Social Security Break

Figuring out the right time to start taking Social Security benefits isnt always a straightforward process. A Social Security break-even calculator can help you get some perspective on the numbers so you know what you stand to gain or lose by taking benefits earlier versus later.

Social Security break-even calculators help you find the best age to start taking retirement benefits. They do this by comparing your cumulative Social Security retirement benefits paid at age 62, your full retirement age and at age 70 and estimating how long it would take the benefits paid at age 70 to break even with benefits paid starting at age 62.

Heres a simple calculation to give you an idea of how a Social Security break-even calculator works. Say that you have the option to begin receiving $1,200 a month in benefits at age 62. Youd receive $1,700 in benefits if you wait until full retirement age at 66. Or you could receive $2,200 a month in benefits by delaying them until age 70.

The break-even point represents when the cumulative benefits even out. So if you wait until age 70 to start taking benefits, it would take you until age 79 to break even with the benefit amount youd receive if you started taking them at age 62. If you were to start receiving benefits at age 66, it would take you until age 75 to break even with the benefits youd receive if you started them at 62.

Is Your Full Retirement Age Affected By Where You Live

Your FRA is not affected by where you live. Most Social Security rules, including those that determine benefit amount and claiming age, are set by federal law. However, some states do tax Social Security benefits, so where you live can affect tax levels on your retirement income. But again, the age at which you claim benefits won’t affect your tax rate — your income is the key factor.

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How Inflation Impacts Your Pia

Your PIA is calculated at age 62. If you wait beyond age 62, cost-of-living adjustments will be applied to your PIA for each year afterward.

If you have already had most of your 35 years of earnings, and you are near age 62 today, the age 70 benefit amount you see on your Social Security statement will likely be higher due to these cos- of-living adjustments. Many people do not account for this when doing their own calculations, which can lead them to think that taking Social Security early is a better deal, when waiting is often the better deal.

In the table below, our hypothetical worker, born in 1954, is eligible for full retirement at age 66. The column on the right shows the effect of inflation for waiting beyond age 62 to take their benefits.

Effect of Age on Claiming Benefits

The Problem: The Economic Toll From The Pandemic Will Very Likely Affect Social Security Benefits

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The initial retirement benefits that Social Security beneficiaries receive in the first year of retirement are determined by a formula that depends, in part, on the growth of average wages in the economy. Due to the economic fallout from the COVID-19 pandemic, the key measure of average wagesthe average wage index is very likely to decline in 2020. As a result, the initial retirement benefits for those who are first eligible to receive benefits in 2022when they reach the age of 62would be significantly less than what was anticipated only months ago, before the pandemic began to exact its economic toll. The effect is very likely to be so significant that workers turning 62 in 2022 would receive initial retirement benefits that are less than those of workers who were born a year earlier and who had essentially the same earnings history. This incongruity is what Social Security experts call a benefit notch. Such a notch would be unfair to the beneficiaries who turn 60 in 2020 and first become eligible to retire in 2022 because benefits are normally expected to grow for each successive cohort of retirees. Moreover, the benefit reduction and notch would have long-lasting consequences, as they not only would affect benefits in the first year of ones retirement but also lower them for every year going forward, as annual benefits are determined by adjusting the initial level for inflation.

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Spousal Benefit Reduction Due To Own Retirement Benefit

If you are receiving a retirement benefit of your own, your benefit as a spouse will be reduced by the greater of:

  • your PIA or
  • your monthly retirement benefit.
  • Example: In addition to receiving a benefit as Janes spouse, Bob is also receiving a retirement benefit of his own. Because he is entitled to a retirement benefit of his own, he will not receive the full spousal benefit . Instead, his spousal benefit will be reduced by the greater of a) his own PIA or b) his monthly retirement benefit.

    Myth #: Youll Never Get Back All The Money You Put Into The Program

    Everyones situation is different, but if you live a long time, you may collect more than you contributed to the system.

    Due to the complexity of claiming strategies and number of variables involved, the SSA no longer offers a break-even calculator on its website. Social Security is designed to provide a safety net of income for the retired, the disabled, and survivors of deceased insured workers. The contributions you and your employers make during your working years provide:

  • Current retirees and other Social Security recipients with payments
  • A guaranteed lifetime income benefit when you reach retirement
  • While the government does not have a specific account set aside just for you with your FICA contributions , one of the most powerful features of Social Security is that it provides an inflation-protected guaranteed income stream in retirement, ensuring against the risk youll outlive your savings. Even if you live to 100 or more, youll continue to receive income every month. And, if you predecease your spouse, your spouse also receives survivor benefits until their death.

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    How Much Can I Earn If I Work After My Full Retirement Age

    If you continue to work after reaching full retirement age, you may work and earn as much as you’d like. You will not be subject to the retirement earnings test, and your Social Security benefits will not be affected.

    If you work prior to FRA, you may forfeit part of your benefits if you earn above annual thresholds. However, your benefit amount will be recalculated at full retirement age to account for most of those forfeited funds.

    Taxes On Your Benefits

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    Your Social Security benefits may be partially taxable if your combined income exceeds certain thresholds. Regardless of how much you make, the first 15% of your benefits are not taxed.

    The SSA defines combined income using this formula:

    • Your adjusted gross income + nontaxable interest + half of your Social Security benefits = your combined income

    If you file your federal tax return as an individual and your combined income is $25,000 to $34,000, then you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, then you may have to pay tax on up to 85% of your benefits.

    If youre married, filing a joint return, and your combined income is $32,000 to $44,000, then you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $44,000, then you may have to pay tax on up to 85% of your benefits.

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    That’s it. Non-citizens, felons, and spouses who didn’t work can all qualify for Social Security as long as they meet those three requirements. The third is a rare category but, for example, it would disqualify someone from getting survivor’s benefits after killing their spouse or someone who gained their work credits fraudulently.

    The third category also means those undocumented immigrants, even though many pay Social Security taxes, cannot collect benefits unless they are considered a “qualified alien.”

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    When Will You Collect

    The SSA calculates your benefit amount at your full retirement age . This depends on the year you were born. FRA by birth year is:

    • 19431954: age 66
    • 1955: age 66 and two months
    • 1956: age 66 and four months
    • 1957: age 66 and six months
    • 1958: age 66 and eight months
    • 1959: age 66 and 10 months
    • 1960 and later: age 67

    The monthly amount you are eligible to receive at your FRA is considered your full benefit, but it is not your minimum or maximum benefit.

    You have the option to file for early retirement as early as age 62. But, you may choose to delay taking your benefits until as late as age 70.

    There are many reasons why you might choose to take early retirement or to delay it. That choice has a direct impact on the amount of your monthly payment. If you opt for early retirement, you are choosing a lower monthly payment for the rest of your life. By choosing to delay your benefit to any age between your FRA and age 70, you lock in an increase.

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