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I’M A BIT EMBARRASSED to admit that, until I started toying with the idea of early retirement a few years ago, I was pretty ignorant about how Social Security worked. I didn’t even pay much attention to the FICA payroll taxes that were deducted from my paycheck.
As I looked into it some more, the prospect of receiving lifelong monthly checks from the government came as a pleasant surprise. I started researching how much I might get.
I learned that my retirement benefit depended primarily on two factors. First, the system would calculate a monthly benefit—called my primary insurance amount—based on my taxed Social Security earnings. The second factor would be when I decided to start benefits. I could claim Social Security as early as age 62, and take a permanent haircut on my benefits, or wait until as late as 70 to juice up my monthly payments.
Based on my birth year, the system designated 67 as my normal retirement age. That’s when I would get 100% of my primary insurance amount—the benefit I’d earned by paying Social Security taxes.
I was still unclear, though, exactly how my benefit would be calculated and whether early retirement might affect it. Should I plan to work longer to boost my monthly benefit? How much longer? Would my benefit grow substantially because of those extra years of toil?
I’d already paid the maximum Social Security payroll taxes for 15 years, thanks to the steady paychecks from my software engineering job. In my naïve thinking, if 15 years of payroll taxes got my primary insurance amount to, say, $1,500 a month, then each additional working year would proportionately increase the monthly amount by another $100 or so.
As with most things, the answer turned out to be more nuanced. To illustrate, imagine a hypothetical worker named Fred who was born in 1960 and started his career at age 22. Throughout his working years, he earned enough to contribute the maximum annual Social Security tax. The accompanying chart shows Fred’s monthly primary insurance amounts if he stopped working at different ages.
Notice that Fred gets nothing if he stops working before turning 32. That’s because it takes 10 years, or 40 quarters, of payroll tax contributions to be eligible for Social Security benefits. Also note the diminishing effect of Fred’s contributions on his benefits during the second half of his career. His benefit’s growth decelerates in his early 40s, and almost stops after age 57, even though he works five more years.
Why are Fred’s later contributions less valuable—or outright ineffective—compared to those earlier in his career? The devil is in the details of the timing and amounts of Fred’s Social Security contributions.
Fred’s annual contributions are indexed, or adjusted, to factor in wage growth over his working life. These indexed earnings are then combined over 35 years to calculate Fred’s average indexed monthly earnings. Think of this as Fred’s Social Security earnings averaged over 420 months, or 35 years of work.
What if Fred worked fewer than 35 years? His earnings would still be averaged over 35 years, but with zeroes for the idle years when no taxes were paid. And if Fred worked for, say, 40 years, his lowest-paid five years would be dropped from the equation.
This explains why Fred’s benefit barely budges after 57. If he keeps working, he’d be replacing lower-earning years with higher-earning years—but he’s credited with 35 years of work in either case. The difference between the two rates of pay isn’t significant enough to bump up his benefit much, particularly after the lower-earning years have been indexed for wage inflation.
Once Social Security computes Fred’s average indexed monthly earnings, it then plugs that number into a three bracket system to calculate his benefit payment. In the first bracket, each dollar of his credited monthly earnings adds 90 cents to his benefit, up to $1,115. The second bracket adds 32 cents for each dollar of credited earnings between $1,115 and $6,721. The third bracket adds 15 cents for each dollar of credited earnings over $6,721.
The idea behind these brackets is to favor the folks who’d probably need the benefits the most due to their lower lifetime income. For example, if Fred had a much lower-paying job, his benefits would be lower—but it would represent a much higher percentage of his working years’ wages.
In my case, starting my benefits at my full retirement age of 67 would provide me with 100% of the primary insurance amount to which I’m entitled. I’d receive a monthly payment for the rest of my life, which could be passed along to my wife if she survives me, plus it’s increased annually to keep up with the cost of living.
As sweet as all this sounds, 67 is not the age when I plan to claim. Waiting for my maximum benefit at age 70 seems like the wiser choice. My benefit would increase by 8% each year I delay claiming, plus annual cost-of-living adjustments will be added on top of that.
I won’t be working until I’m 70, though. Like Fred, working longer would increase my benefits only marginally—certainly not the $100-a-month boost that I’d imagined. Grinding beyond a few more years for the sake of a minimally higher Social Security payout doesn’t seem appetizing. Waiting a little longer to claim, though, does seem palatable given the big gain in benefits that would result.
Want to know where you stand? You can get an estimate of your benefits from Social Security’s online calculator.
Sanjib Saha is a software engineer by profession, but he’s now transitioning to early retirement. Self-taught in investments, he passed the Series 65 licensing exam as a non-industry candidate. Sanjib is passionate about raising financial literacy and enjoys helping others with their finances. Check out his earlier articles.
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If you’re a couple with basically one income and one person will eventually claim the spousal benefit, waiting until each of your FRA’s is like boosting your combined benefit by 12% (8% for high earner, 50% of that for spouse). That’s how I view delaying collecting SS until FRA or later.
I took SS at my FRA of 66, and my wife took her 50% of mine early (she is 3 years younger) minus the “penalty’ for taking it before he FRA. We didn’t need the money, but we decided we didn’t want to wait based on the break even age. We took the SS money and invested it and it has done well. We aren’t concerned about having higher payouts after we are in our 80’s. The delay strategy makes sense for those who will need the higher income should they live a long life
Thanks, Boomerst3. As you said – the delay strategy is great for folks looking to reduce the longevity risk, especially if someone is contemplating a commercial annuity to handle the longevity risk. I think it’s less opportunity cost to delay the SS than to buy an annuity for this purpose.
It’d be an interesting exercise to compare the cost of commercial single-payment annuities for the two scenarios:
annuity 1 – start a payment of $X at FRA with riders for survivor benefits and 2% annual increase.
annuity 2 – start a payment of ($X + delayed credit) at age 70 with riders for survivor benefits and 2% annual increase.
Last few times I checked, the single-premium cost for annuity 2 was higher than annuity 1. This implies that from risk-management perspective, annuity 2 is more valuable.
I think I used an annuity cost estimator from schwab (https://www.schwab.com/annuities/fixed-income-annuity-calculator )
We followed a similar strategy and the investment is still paying.
Thanks for a very informative article, Sanjib. Your article prompted me to login to my SSA account and check my benefit at FRA (66 and 10 months). I was pleasantly surprised to see a bump of 8.9% this year. I haven’t yet decided when I will start drawing SSI.
Thanks, Nagaraj. Please note that the basic SSA calculator assumes that if you claim at FRA, you are also working (contributing) until FRA. If you are planning to stop working before FRA, you probably need to tweak the inputs a bit or use a calculator that lets you customize/fine-tune your input.
Thanks. Indeed, that is my situation. Plan to stop working in 2 years, at 65, from my faculty position at the Univ of Florida. Might collect SSI at 68.
There is no breakeven for those of us who are self-employed – it’s an unfair, ridiculously punitive tax that doesn’t reflect today’s work world. The program is a loss for us, compared to how we could have invested those dollars.
There are a huge number of contract and gig workers – most in low income roles. Why must each pay DOUBLE the cost that a W-2 employee does – with zero added benefit?
It’s blatantly discriminatory, but no one in power seems to care. If the benefits are cut as projected, that’s an even greater travesty for us, given how much more we paid than w-2 employees.
Way too complicated. Take the benefit when you need the income or take it when you can put it to use. Forget the breakeven scenario, who cares? It means nothing.
My idea of breakeven was when my accumulated benefits exceeded all the taxes paid by me and my employers since 1959. That occurred less than 8 years after a started collecting at age 66 (FRA).
Breaking my own rule, I didn’t need the SS benefit when I took it, I was still working. So I invested it and still do mostly. That pool of investments kicks off monthly interest almost equal to my net SS – it’s been reinvested and compounding for 14 years. Now I have a pool of money and a supplemental income stream when I need it.
I used similar logic when I filed for benefits. Compare your life expectancy using the IRA Required Minimum Distribution tables for your FRA and compare that to the break even calculation for delaying the benefit. That’s a reasonable comparison.
Forget break even. If you’re dead you won’t care whether you broke even or not. What counted for me was the largest initial payout, so I had the largest base for COLAs. Therefore, I waited until 70 (although I was able to draw spousal on my ex’s account while waiting). I doubt I have broken even yet, and if I knew I would drop dead tomorrow I would not care.
Hey MyTime, I think the same way. There’s rewards in delaying gratification. I’m happy with a bigger monthly check and having extra, unneeded money is OK. I don’t look at the price of eggs at all!
If I was wanting to see my ‘break even’ point, I start with what amount I personally had to pay in. NOT me and the employers amount. After all, with an other investment, that’s what we do.
Congratulations on going 70 and out!
The Open Social Security website (see below) will make these calculations for you.
Thanks for an informative article. Delaying collecting Social Security until age 70 results in higher total benefits if you live to about age 80 and beyond. If you are in good health and can afford to defer collecting, it generally makes sense to defer. It is like buying an annuity for old age so you are less likely to run out of money before you die. But it is not an all or nothing decision. Your benefit goes up a fraction of a percent for each month you defer. I used to recommend to my former investment clients to review their decision to defer annually. If your health deteriorates, you can start collecting and will have a higher benefit but not the maximum. If you stay in good health and your financial situation allows it, you can continue to defer.
For married couples, you can use a mix and match approach. The higher earning spouse would defer to age 70 and the lower earning spouse could start collecting at full retirement age or some point between full retirement age and age 70. If the higher earning spouse dies first, the surviving spouse’s benefit goes up to the deceased spouse highe benefit. So there is less of a need for both spouses to defer to age 70 although you would still maximize benefits if both deferred and lived past age 80.
Bob, if I’m reading you right, you’re saying that, in a case where the higher earning spouse deferred till 70, there is also some benefit for the lower earning spouse to defer beyond his/her full retirement age? My understanding has been that, in that scenario, there is no additional benefit for the lower earning spouse to defer past their full retirement age.
These articles seem to support my understanding:
How Are Social Security Spousal Benefits Calculated? (investopedia.com)
“At your full retirement age (67 in this example) you’d be eligible for the maximum, which is 50% of your spouse’s full benefit.”
Social Security Spousal Benefits: What Spouses Can Get | Bankrate
“And if you wait until after your full retirement age, benefits won’t increase. The wage earner may benefit from delaying benefits until age 70, but the spouse applying for benefits won’t.”
What am I missing?
It depends which benefit we’re talking about. If we’re talking about benefits based on your own earnings record, that does indeed increase up until age 70. If we’re talking about spousal benefits, there’s no advantage in claiming later than your full retirement age because there’s no further increase after that, beyond the COLA. Still, some spouses don’t get their spousal benefit until after full retirement age — because the other spouse (the main breadwinner) is delaying benefits to get a larger monthly check and the husband or wife can’t receive spousal benefits until the main breadwinner claims.
Thanks, Jonathan.
Thanks, Bob. The strategies you outlined are great. The Open Social Security website does a fantastic job with these optimizations.
Thanks Sanjib, when to claim social security benefits is a favorite topic of mine. Your article is a good example of the factors that are the typical criteria that are considered in the claiming decision.
I waited to age 70 claim to my social security benefit based on my own earnings records. As I was born before 1954 I was eligible to file a restricted application and I claimed a spousal only benefit for five months prior to my age 70 and then I then claimed based on my own work history.
The ability to file a restricted application and receive a spousal only benefit is now repealed for anyone born in 1954 or later except for a surviving spouse.
Understanding all of the Social Security rules and exceptions that impact you is important prior to claiming because there are numerous opportunities and pitfalls that are unique to each individual. I found I became a student of claiming strategies prior to my claiming and found the following sources helpful in my claiming decision –
Professor Larry Kotlikoff website – Ask Larry https://maximizemysocialsecurity.com/ask-larry books – coauthor of a book with two other PBS contributors titled Get What’s Yours: The (Revised) Secrets to Maxing Out Your Social Security. The book originally came out in 1995 and was revised for the law change regarding restricted applications. It was a NY Times bestseller for a short while. His subsequent book – Money Magic published in 2022 was a good read also for me. His company, maximize my social security, also sells a software program to provide you information to optimize your social security claiming choice based on your own circumstances. I have not used /bought the program.
Jonathan Clements – The online Humble Dollar guide, his books, columns and interviews on other websites he has appeared on have helped me make better social security and financial decisions. I feel my informed claiming decisions should allow me to avoid running out of money before I run out of breath.Thank you JC!
Tom Margenau –
https://www.arcamax.com/healthandspirit/seniorliving/socialsecurityandyou/ Tom Margenau has written the “Your Social Security” column for national syndication since 1997. He also worked for 32 years in a variety of positions for the Social Security Administration before retiring in 2005. Tom writes a weekly column from his perspective as a former Social Security representative.
Michael Piper, CPA – https://obliviousinvestor.com/how-social-security-benefits-are-calculated/ Author of Social Security Retirement Benefits and Related Planning Topics Explained in 100 Pages or Less and blogger and has a free SS calculator https://opensocialsecurity.com/.
Devin Carroll –
https://www.youtube.com/c/DevinCarroll – A financial planner & video blogger with frequent presentations on social security that has breaking news about specific social security topics.
I hope the sources of my learning path helps others in their decisions. I think for many when to claim social security benefits could be a vital financial decision, it was for me.
Best, Bill
Thank you, Bill. The “Get What’s Yours” book you mentioned above is a great one to fully understand the complexities and various nuances of the system. I haven’t checked the companion book for Medicare, but I plan to do so in the coming months.
Sanjib, I think the Medicare book is of particular importance to anyone enrolling after age 65. My old long term job ended when I was 68. My employee +1 health insurance had been previously been provided by my former employer plan, part of a large PEO. When my former employer retired/ended and merged his practice to a less than 20 person firm I would have to have had both the employer and Medicare for me (as Medicare coverage would have been primary for me in a small firm group policy) to allow for my under age 65 wife’s needed group medical coverage under that potential new employer plan. My wife and I decided for me to sign up for Medicare in the special enrollment period and get COBRA coverage for my her until her age 65 eligibility for Medicare. I took a job at a different large employer and not the small one and the health insurance decision was one of the major factors of where I chose to work. There was a gap in time between jobs where my employment was uncertain. I am happy to say that the COBRA premiums were an eligible expense from my former HSA savings. My Medicare Part A was retroactive to six months before the effective date of my part B coverage so there were limitations on my HSA contributions in the year my change to Medicare occurred. Reading the book changed the direction of where I spent the last four years of my career.
I have loaned my copy of Get What’s Yours -Medicare out and have never been able to get it back as the next reader always know someone who would benefit from reading it. I consider it a must read book.
Best, Bill
Good summary of SSA. Like you, I didn’t start paying close attention to it until I retired a few years ago because I still had several years before I could even start it. As I approached 62 I started modeling it in a spreadsheet as well as using various online calculators to figure out how different claiming ages affected my lifetime benefit.
One thing I noticed is that the oft-cited 8% per year increase in the benefit that you get if you wait until 70 looks to me more like an average rather than what actually happens based on the estimates I get from SSA based on my actual salary history.
I just re-ran my SSA estimate on their website and got the following annual benefit increase percentages for my actual salary history:
5.21%, 8.23%, 7.57%, 5.91%, 3.32%, 7.74%, 12.59%; for claiming ages 64, 65, 66, 67, 68, 69, 70.
Not sure why there’s such a big jump from 69 to 70 of over 12%.
Also, one thing I didn’t fully understand when I first started playing around with the SSA site is that they automatically assume you’ll continue working up until you claim; and they use some type of algorithm to estimate your annual income through those years. This in turn could increase the amount of the benefit for some people, if the algorithm skews future estimated earnings toward higher earning years. When you run your estimate you are given the option of setting future earnings to $0, which is what I did since I’m retired now.
Also, I’m not sure whether COLA is included in the SSA estimate or not.
And lastly, I did calculate annual delayed benefit increase percentage based on a constant increased amount. I calculated constant amount by subtracting from my age 70 benefit the age 64 benefit amount, and then dividing the result by 7 (the number of years between 64 and 70). Then I calculated the percentage of the increasing annual benefit that fixed amount represented. This smoothed out the lumpiness in the actual estimated annual increases, going from 8.94% at 64 to 6.19% at 70. Again, this is without any COLA factored in (unless SSA already includes that in their estimates).
Thank you, tshort. Interesting that you see such uneven jumps in the SSA estimator. I’ll play around with it to see if there’s an explanation.
Great explanation Sanjib. Most folks believe that they must take SS as early as possible, well I beg to differ. It all depends on your health, do you have a job, how old is your spouse, and your tax situation. All should strive to at least wait until your full retirement age (FRA) to take SS. In addition, if you quit your job at 62, I strongly suggest you discuss that situation with an Registered Investment Advisor (RIA) on an hourly fee basis, because you will need medical insurance for yourself and your family if you have one and it is not cheap (think ACA and its large deductibles per person). Now, if your company you are retiring from offers retiree medical coverage similar to or the same as when you were working, then that is a plus in your decision until you go on Medicare at 65.
It’s complicated and everyone has different variables in making that decision. There is no one size fits all.
Thanks, Randy. I agree that retiring before 65, without medical insurance coverage from former employers or working spouses, gets tricky and expensive. As you said – there’s no one-size-fits-all solution.
Good article. SS’s anypia program can be downloaded (Mac or PC) and used to estimate benefits based on past and future earnings. You can also plug your earnings in online but the downloaded version gives you a permanent version that you can easily update.
https://www.ssa.gov/oact/anypia/download.html
Thanks for the tip, parkslope. I didn’t try the downloaded version of the App but sounds like it’s better for tweaking/experimenting purposes.
One of the solutions often suggested to remedy the coming shortfall in Social Security is conduct means testing. What many don’t realize, and what this article demonstrates, is that social security is calculated to proportionally provide more benefits to those who contribute less. In other words, there is already significant means testing that takes place.
To be correct, it’s those who earn less, not contribute less. Taxes are unrelated to benefits paid. But the concept of a means factor is correct.
A very good article; thanks. My only minor nit is that your example portrays a person who contributed the maximum annual amount of social security taxes throughout their entire career. I don’t know but I suspect that’s not the common case. I suspect the more common case is someone who has a significant number of early years where their contributions are much lower, and only approaching (or reaching) the maximum contribution in the later part of their career. If so, I suspect that curve will continue upwards later in the persons career as early years of very low contributions are replaced by later years of significant contributions. A person with an earnings history such as I describe might incur larger benefits due to the later years of their work history, thereby incentivizing that person to continue working longer to replace more of the low years. But I’m guessing on the magnitude of the effect. After studying it as you did what’s your thoughts?
Thanks, OldITGuy. You are absolutely right about the observation that the those who didn’t max out the earnings in their early years will continue to boost their payout even in their later years, but the magnitude would depend on where their cumulative earnings fall within the 3-braket system. If the earnings are still within the first bracket, then the pace will be high. Once it crosses the first bend point, the pace would drop but will still be meaningful. Exceeding the second bend is where the value drops significantly.
There are a couple of other nuances involved in the calculation. Earnings past age 60 aren’t indexed anymore. So those would add less to their AIME.
This isn’t a “nit” for me — it describes my situation exactly. I crossed the social security tax limit during my most recent 30 working years, but the earlier years are well below the threshold. What’s the net effect to keep working? I know what my benefit would be to continue working five more, fully taxed years to age 67. The SSA online calculator shows that projection. But what if I stopped working this year at age 62 and waited until age 67 or 70 to apply for benefits? I don’t think the calculator shows that. My “monthly benefit amount” seems to assume that I stop working and apply for benefits at the same time. So, unless there’s another way to do it, I’m also left guessing at the magnitude of the effect.
Thanks, HumbleBrag. You can use the online calculator to figure out your benefit amount at 62 if you stopped working at 62. You can then adjust that amount upward by using the “early claim” reduction table and “delayed claim credit” table to figure out what the benefit would be at your full-retirement-age or at age 70. With this extrapolated amount, you can easily compare how much your increased amount at 67 is due to delaying the claim, and how much is due to additional contributions to the system.
Yeah, I remember having the same problem. If I remember correctly I think I took the figure it gave me for 62 and then manually increased it by 7.5% (or was it 8%) per year and then compared that number to what it said I’d get at 67 if I kept working. If memory serves, I think it put me in the ballpark. SSA.gov does have a detailed calculator you can download, but I didn’t do that so I can’t speak to it.
Very nice explanation, I didn’t know about the brackets. I waited until 70 to claim, so that I got the biggest possible base for future cost of living increases. However, some people need the money to live on and can’t benefit from that option.
Thanks, mytimetotravel. In addition to what you said, there can also be legitimate scenarios where claiming sooner is the right choice. It’s unfortunate that a basic decision like this can get so complicated and confusing depending on individual circumstances.
I think you are mistaken to see the SS benefits that you receive as yours alone, as though you have an individual acct that you put into and withdraw from. While it is true that you actually can see how much you put in each year from age 18 to present and get a monthly check based on your individual contributions, the system is built to help all of us, collectively. I have worked for decades, put in a lot of money, and am withdrawing a lot starting at age 70. My neighbor has a far weaker history and then health problems — his check is much smaller, but he gets a check he can live on along with Medicare. So, all together, our connected world is stronger, and I do not have to support him individually nor feel badly about not doing so. This is the benefit of socialism in our capitalist world.
Will, you had me all the way up to that last sentence.
As you concluded that is why most people should just model their benefit using the SS online calculators.
Most people think SS benefits are related to taxes paid, they aren’t. Many people collect benefit never having paid a penny in payroll taxes. SS is funded by more than payroll taxes.
The bend points (or brackets) in the benefit formula skew the benefit to lower paid workers and also why the taxable wage limit could be eliminated, additional benefits provided accordingly and still improve the SS trust fund status.
Social Security pays out much better than most people think. My wife and I will receive $79,488 in three years when we start taking benefits at age 70. My benefit will be $4687 per month and my wife’s spousal benefit will be $1937 for a total of $6,624 per month which is $79,488 a year. That’s a pretty huge benefit, equivalent to two million in invested assets if you use the 4% rule. There is no other country in the world that provides that large a retirement benefit. In my case I earned above the maximum taxed amount every year of my 38 year career. I don’t need the money but I’ll be happy to take it. However I’d have even more if they had let me invest it myself.
This year’s 8.7% increase raised our combined SS benefits $7,700 to $96,300. Very glad that both of us were able to wait until we were 70 to claim.
Very interesting and well explained. I didn’t know a lot of that. Thanks Sanjib.
Thanks for the note, Michael1. Glad that you found it informative.
Great article Sanjib. I thought I was pretty knowledgeable about SS too but, alas…not.
I didn’t know about the three brackets, and the flattening of the benefit curve in later years with higher earnings.
You may have saved many readers from continuing to toil away in high paying jobs that they no longer enjoy from staying with it just because they thought it would result in earning higher SS benefits.
These people may now feel free to either quit their job and find a job they are passionate about that pays less, or retire earlier if they have been diligent savers.
Thanks, David. I also observed that the topic of “file early or wait until 70” gets a lot of attention, but there isn’t as much discussion on how the benefits are calculated and whether extra working years have a proportional effect on the payout or the marginal one.
Thanks for an easily understandable explanation of the bureaucratese used in the official descriptions of SS benefits, Sanjib!
Thank you, Chazooo.