Question #2 – Should I Retire Now Or Wait Until I Reach Full Retirement Age?

This is something I got asked a lot when I was working at SSA, and still am, when people find out that I used to work there.  The general answer is that someone who files earlier will receive more money than someone else who delays filing, at least for a period of many years, all other factors being equal.

Full Retirement Age

The first issue we need to cover is that of “full retirement age” (FRA.)  For many years this was age 65.  The month a worker attained (1) age 65 he was eligible for his full Social Security.  If he filed an application and met the other factors of entitlement, he would become “entitled” to benefits, a beneficiary, and begin receiving his FRA amount.

(1)  Social Security uses the word “attained” when referring to reaching a particular age.  If one’s birthday is anything except the last day of a month, one attains a particular age in that month.  If one’s birthday is the last  day of the preceding month, then one is considered to have attained a particular age in the preceding month.  This is particularly important with attaining age 62.  The first month a worker is potentially eligible for retirement benefits is the month following the month of attainment of age 62.  In other words, that worker will not be potentially eligible until the month after the month in which his 62nd birthday occurs.

However, one attains FRA in the month in which the appropriate birthday, plus the extra months, if any, occurs.  For example, if a worker was born on July 15, 1956, he attains FRA on November 15, 2022.  If he becomes entitled to retirement benefits in November, 2022, he will be entitled to a full, unreduced benefit amount.

In the 1983 Amendments to Social Security, one of the cuts the Reagan administration and a compliant Congress made was an increase in FRA from 65 to 67, to be slowly phased in starting with people born in 1938 and ending with people born in 1960.

Chart Showing Full Retirement Age Based On Year Of Birth

Year Of Birth Full Retirement Age (FRA) Months Between Age 62 And FRA
1937 And Earlier 65 36
1938 65 And 2 Months 38
1939 65 And 4 Months 40
1940 65 And 6 Months 42
1941 65 And 8 Months 44
1942 65 And 10 Months 46
1943 Thru 1954 66 48
1955 66 And 2 Months 50
1956 66 And 4 Months 52
1957 66 And 6 Months 54
1958 66 And 8 Months 56
1959 66 And 10 Months 58
1960 And Later 67 60

The Age Reduction Factor (ARF)

When a worker chooses to start receiving his retirement benefits prior to attainment of FRA, there is a reduction in the amount he will receive.  This is called the “Age Reduction Factor” (ARF.)

The amount of the ARF is 5/9 of 1% from the primary insurance amount (2) for each month for the first 36 months.  At 36 months the total ARF is 20%.  The ARF continues to increase beyond 36 months, but the rate of increase is a little less.  The ARF is 5/12 of 1 percent for each additional month after the first 36 months.  At 48 months, which is the maximum number of months before FRA that one can file for retirement, the ARF is 25%. This maximum number of months will remain the same through 2020. In 2021, it will begin increasing again, as you can see from the chart above.

(2)  The “primary insurance amount (PIA) is the full, unreduced benefit amount which becomes payable at the FRA, or if the beneficiary becomes entitled based on disability.

So, Should I File Early Or Wait Until Full Retirement Age?

According to Social Security, an average worker will get about the same amount of money over his lifetime regardless of whether he files early or waits until FRA to file.  I agree with this statement, to a certain extent, but there is more to it than that.  Basically, a worker who files early and receives a reduced benefit due to his ARF will be ahead for a surprisingly long time because of the payments he receives that he would not have received had he waited for his FRA.

Example 1

An example shows how this works.  For the purposes of the example, I am assuming no COLAs and no work after retirement.  Felix is considering filing for his Social Security retirement as soon as he is eligible for it.  His date of birth is March 15, 1949, so he attains age 62 in March, 2011.  He is first eligible for Social Security retirement as of April, 2011, the month following the month of attainment of age 62.  His FRA is 66.  Felix’s PIA is $1600.00.  This is the amount he would get if he waited until his 66th birthday. March 15, 2015, to file.  If he files for retirement in April, 2011, he is filing 48 months before his FRA.  This means that his ARF is 25%.

36 Months at 5/9 of 1% per month = 20%
+ 12 Months at 5/12 of 1% per month = 5%
Total 25%

Felix’s benefit amount will be $1200.00 per month (75% of $1600.00.)

He will get this amount for 48 months that he would otherwise give up had he waited until March, 2015.  That is a total of $57,600.00.

If he chooses to keep working and wait until FRA to retire, he gives up this $57,600.00.  By giving it up, he gets to keep his $400.00 per month, which would have been the cost of the $57,600.00.  At $400.00 per month, it will take him 144 months (12 years) to get back the $57,600 he gave up by waiting until FRA to file.  This will occur on his 78th birthday, March 15, 2027.  After that, he is ahead in amount received from Social Security.

Example 2

Let’s try another example, this one showing the effects on someone who is already past age 62.  Once again, for the purposes of the example, I am assuming no COLAs and no work after retirement.  Felix’s friend Oscar is also considering retirement.  Oscar’s date of birth is July 15, 1947, so he already attained age 62 on July 15, 2009.  Like Felix (and most of the main cohort of baby boomers) his FRA is also 66, which he will attain on July 15, 2013.   Oscar’s PIA is also $1600.00.  If he files for retirement in April, 2011, he will be filing 28 months before FRA.  This means his ARF is 15.56%.

28 Months at 5/9 of 1% per month 15.56%

Oscar’s benefit amount will be $1351.00 per month (84.44% of $1600.00.)

He will get this amount for 28 months that he would otherwise give up had he waited until July, 2013.  That is a total of $37,828.00.

If he chooses to keep working and wait until FRA to retire, he gives up this $37,828.00.  By giving it up, he gets to keep his $249.00 per month, which would have been the cost of the $37,828.00.  At $249.00 per month, it will take him almost 152 months (12 years 8 months) to get back the $37,828.00 he gave up by waiting until FRA to file.  This will occur when he is just under 78 years, 8 months old, in March, 2026.  After that, he is ahead in amount received from Social Security.

If you don’t feel like doing all the math yourself, Social Security will do some of it for you.  Go to the Social Security Online: Retirement Planner: Retirement benefits by year of birth page, and click on your year of birth. You will get a chart showing all possible ARFs from age 62 to FRA, for both the worker and his or her spouse.  All you need is your PIA amount, which, if you are fully insured and meet other requirements, you can get online.  Go to About The Retirement Estimator page at Social Security Online to access the Estimator.  Social Security also sends you an estimate every two or three years by mail.

Conclusion

There are advantages and disadvantages to taking your benefit before your full retirement age. The main advantage is that you collect benefits for a longer period of time. The main disadvantage is your benefit is reduced. Each person’s situation is different.

One factor is to consider your health. If you are still healthy and have no particular desire to stop working yet, consider continuing to work. There are advantages to working beyond your FRA, called “delayed retirement credits” (DRCs). For a worker born in 1943 or later, he receives a increase to his FRA amount of 2/3 of 1% for each month beyond FRA he delays filing for Social Security. This comes to 8% for a year. However, the worker cannot receive DRCs for months after he reaches age 70. There is no advantage to delaying filing for retirement after attaining age 70. More on DRCs and other effects of work on retirement benefits in a later post.

However, if you are approaching age 62 or are past it, but under FRA, and due to declining health continued working has become a struggle, it would probably be in your best interest to file for retirement as soon as possible. If you believe that you are disabled to the point where you cannot work substantially, you can combine a retirement claim with a disability claim. If the disability claim is approved, you will get your FRA amount without reduction.

Another factor to consider is whether you can afford to take a reduced retirement amount. Some people continue working, but curtail their hours so that they can receive their reduced SSA benefit and some wages. More on this in a later post (the one referred to above.)

As you can see, the decision whether to file for retirement early, or to wait for FRA or beyond, is a personal decision, and a lot of factors need to be considered. SSA recommends that you contact them before you make any final decision when to retire.

Note: If you decide to delay your benefits until after age 65, you should still apply for Medicare benefits within three months of your 65th birthday. If you wait longer, your Medicare medical insurance (Part B) and prescription drug coverage (Part D) may cost you more money. I will go into this in greater detail in a post about Medicare, which is currently under revision.

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