Calculating the Social Security Retirement Benefit

There are three factors that go into determining the Social Security retirement benefit amount – your PIA (Primary Insurance Amount), your FRA (Full Retirement Age), and the age you are when you start receiving benefits.  We talked about the PIA here; then we talked about the FRA here.  Having these two numbers, we need to consider if you are applying for early benefits, and therefore a reduced amount, or if you’re delaying receipt of benefits to increase the payment amount.

Applying Early for Reduced Benefit Amount

When you apply early (before your FRA), a formula goes into effect to determine how much your benefit will be reduced.  First, determine how many months there are between your FRA and the age at which you’ll start receiving benefits.  The PIA will be reduced by a percentage based upon the number of months you come up with.  The first 36 months are multiplied by 5/9 of 1%, and any months beyond 36 are multiplied by 5/12 of 1%.

So, if your FRA is age 66, and you intend to begin receiving benefits in the month that you are age 62 and 6 months, your PIA would be reduced by 20% for the first 36 months (36 * 5/9% = 20%) plus an additional 2½% for the remaining 6 months (6 * 5/12% = 2½%) for a total of 22½%.  The maximum amount that the PIA can be reduced is 25% for folks with FRA of age 66, ranging up to 30% for those with FRA of age 67.

When you come up with this reduction factor, it is then applied to your PIA, and the result is your anticipated benefit amount.  You can see in the table below how waiting a few months or years can make a big difference to the benefit amount.  And this change can have a huge impact on your lifetime benefits – because once you start receiving your benefit, it won’t change other than with the annual COLA increases – unless you continue to work while receiving benefits, which could increase your PIA.  The other way to increase your benefit is to take the “do over” – described here.

Delaying Receipt of Benefits to Increase the Amount

If you are delaying your retirement beyond FRA, you’ll increase the amount of benefit that you are eligible to receive.  Depending upon your year of birth, this amount will be between 7% and 8% per year that you delay receiving benefits – which can be an increase of as much as 32½% if you delay until age 70 and you were born in 1941 – when your FRA is 65 years and 8 months, and the increase amount is 7½% per year at that age.  See the table below for the increase amounts per year based upon birth year:

So you can see the impact of delaying receipt of retirement benefits – it can amount to more than 50% of the PIA, when you consider early benefits versus late benefits.  Of course, by taking benefits later, you’re foregoing receipt of some monthly benefit payments; given this, early in the game you’d be ahead in terms of total benefit received.  This tends to go away as the break-even point is reached in your mid-70′s to early-80′s in most cases, which we’ll review in a later article.

Photo by Aric Riley

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 Jim Blankenship, CFP®, EA, is an expert in personal retirement, IRAs, and tax issues, with more than 25 years of experience in the industry. Read more from this author