Photo courtesy of Jake Hills on unsplash.com.
So you’ve seen your statement from Social Security, showing what your benefit might be at various stages in your life. But not everyone files for benefits at exactly age 62 or 66 – quite often there are months or years that pass before you actually file. This article will show you how to compute your monthly Social Security benefit, no matter when you file.
Computing your monthly Social Security benefit
First of all, in order to compute your monthly Social Security benefit, you need to know two things: your Primary Insurance Amount (PIA) and your Full Retirement Age (FRA). The PIA is rather complicated to define, but for a shorthand version of this figure, you might use the figure that is on your statement from Social Security as payable to you on your Full Retirement Age (or “normal” retirement age).
Full Retirement Age (FRA) is simpler to define – it’s based on your year of birth. For folks born before 1955, effectively age 66 is your FRA. If born prior to 1946 it would be less than age 66, by two months per year down to a minimum of age 65. If born in 1955 or later, FRA increases by two months per year to a maximum age of 67 if born in 1960 or later.
Knowing these two things, you now need to make a determination of when you plan to file – is it before FRA for you, or after?
Before FRA If you plan to file prior to your FRA, count up the number of months prior to FRA that you’ll be filing. If it’s 36 months or fewer, multiply the number of months by 5/9%, and this will be the amount of reduction from your PIA that your monthly benefit will be. On the other hand, if the number of months is 37 or greater, you will subtract 36 from your number of months and multiply that number by 5/12%. Add 20% to the figure that results, and this will be the amount of reduction from your PIA.
For example, Joe has an FRA of age 66, and he plans to file two months after his 64th birthday. This works out to 22 months before Joe’s age 66. So the calculation is as follows:
22 x 5/9% = 110/9% = 12 2/9% or 12.222% reduction
So Joe’s monthly benefit, based on a PIA of $1,500, would be 87.778% of $1,500, or $1,316. Now, on the other hand, if Joe decided he wanted to file for benefits 6 months after his 62nd birthday, the other calculation would apply. This is 42 months prior to Joe’s FRA, so the calculation goes as follows:
42 – 36 = 6
6 x 5/12% = 30/12% or 2 1/2% plus 20% = 22.5% reduction
In this case, Joe’s monthly benefit based on his PIA of $1,500 would be 77.5% of $1,500, or $1,162.
After FRA If you’re looking to delay receiving your benefits until after your Full Retirement Age, a completely different calculation is used – because now, instead of reducing your benefit we’re increasing your benefit from your PIA. These increases are referred to as Delayed Retirement Credits, or DRCs. The calculation for a DRC is much simpler than the reduction calculation: an increase of 2/3% per month of delay past FRA.
Jane, also with a PIA of $1,500 and FRA of age 66, wants to file for her benefit 3 months after her 68th birthday. This works out to 27 months of delay after her FRA. Calculation works out to:
27 x 2/3% = 54/3% or 18% DRC increase
Multiplying that DRC increase by Jane’s $1,500 PIA works out to a monthly benefit of $1,770 for Jane.