SOCIAL SECURITY RETIREMENT BENEFITS

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This part of our web site explains key facts about the retirement benefit provided by the social security program. We do this to provide a better general understanding of this benefit, and to help you make informed decisions about your benefit, such as when to stop working and when to begin taking benefits. These choices are important because they can affect the amount of retirement benefits you receive for the rest of your life.

This is not by any means intended to be a complete guide to social security. The overall program is huge, and hugely complicated. It provides other benefits (disability and survivor benefits), and there are many rules that apply to special situations. The Social Security Handbook, offered by the Social Security Administration as a “readable, easy to understand resource” about the program, is over 700 pages long. For now, our limited goal here is to answer a few of the key questions you may have about the core benefit provided by the social security program, making it easier for you to understand and work with this information. We plan to expand this section before long to add other topics, including coverage of the ongoing social security reform debate. Meanwhile, if you need information on other aspects of the program, you’ll find much more information at Social Security Online, the official website of the Social Security Administration. But stay right here if you want clear, helpful guidance on the topics below.

Overview of Social Security Retirement Benefits

Social security provides a lifetime retirement benefit in the form of a monthly check that’s adjusted each year for inflation, to individuals who meet three requirements:

  • You must have 40 credits for covered work, generally satisfied by having at least 10 years in which you had substantial earnings that were subject to social security tax or self-employment tax.
  • You must be over 62 years of age.
  • You must apply for the benefit. You aren’t entitled to the benefit if you don’t file an application.

Calculating the Benefit

The main social security benefit, called the primary insurance amount, is calculated according to a complicated process that looks at your entire work history. Your earnings from early years are adjusted for inflation, so that all years are roughly comparable. We select the 35 highest years (including years with zero earnings if you have fewer than 35 years with earnings) and determine the average indexed monthly earnings. This number goes into a three-tiered formula designed to provide a higher percentage benefit to people with lower earnings, but a higher total benefit to people with higher earnings.

We’ll see that an additional year of covered work can qualify you for a higher benefit, even if you’re already receiving a retirement benefit from social security. Yet the effect varies quite a bit. Depending on your overall work history, working another year can boost your benefit by a large amount, or a small amount, or have no effect at all.

Early or Later Retirement

Your full retirement age (also called normal retirement age) comes a few years later than age 62. (Exactly when it comes depends on when you were born.) If you choose to begin receiving your benefit before your full retirement age, you’ll receive a reduced benefit. You can also choose to begin receiving your benefit later than full retirement age, in which case you’ll receive an increased benefit (more than 100% of the normal benefit).

If you choose to begin receiving your benefit early, you’ll have to contend with the earnings test, which reduces the size of your benefit if you earn too much during the period before you reach full retirement age. In any event, to make an informed decision about when to begin receiving social security benefits you should understand how it will affect the total benefit you’ll receive over the remainder of your lifetime. We’ll see how to determine the break-even point, when the larger benefit you’ll receive if you start later catches up with the smaller benefit you’ll receive if you start earlier.

Covered Wages and Social Security Tax

Workers generally have social security tax deducted from their wages, up to an annual limit called the social security wage base. The employer pays social security tax, too, so the total amount paid into the system is twice as much as the amount you pay as an employee. If you’re self-employed, you have the dubious privilege of paying both sides of the tax: the employee side and the employer side.

Tax Rates

The amount deducted from your paycheck is 7.65% of your wages. This consists of 6.2% for social security benefits and 1.45% for Medicare benefits. The Medicare tax applies to the full amount of wages, but the social security tax applies only up to the wage base. If your earnings with a single employer exceed the wage base, you’ll see the withholding rate drop from 7.65% to 1.45% on the excess wages. There is no dollar limit on the Medicare tax.

If you work for more than one employer in the same year, each one will withhold at the higher rate until your earnings at that employer exceed the wage base. If you have excess withholding of social security tax for this reason, you can get it back in the form of a credit on your income tax return for that year.

Social Security Earnings

In the social security system, earnings are wages and net earnings from self-employment. Other types of income, such as investment income, can affect the amount of income tax you pay on social security benefits, but they are not included as part of the earnings that determine how much social security tax you pay, or the size of your social security benefit.

Social Security Wage Base

The annual limit on covered wages is called the social security wage base. It has double importance. The good news is that it limits the amount on which you have to pay social security tax each year. The bad news is that it also limits the amount of wages that go into the formula that calculates your benefit. In other words, the excess earnings won’t help you qualify for a higher benefit.

Example: Your 2009 wages are $130,000. The social security wage base for that year is $106,800, so you pay social security tax on only the first $106,800 of wages. When your retirement benefit is calculated, you’ll be treated the same as someone who had $106,800 of wages that year.

The social security wage base is adjusted each year for inflation. The following table provides the amount for recent years.

Full Retirement Age

Full retirement age (also known as normal retirement age) determines when you can receive your full retirement benefit. If you choose to begin receiving retirement benefits earlier, yourbenefit will be a reduced percentage of the amount you would have received if you waited, as explained here. You can also receive an increased benefit by delaying still further, until after your full retirement age.

Full Retirement Age

For a long time, full retirement age was fixed at 65 years. In a major overhaul designed to improve the solvency of the system back in 1983, Congress passed a law that increased the full retirement age for people born after 1937. The following table gives the full retirement age under current law:

Full Retirement Age
Year of Birth Full Retirement Age
1937 and earlier 65
1938 65 and 2 months
1939 65 and 4 months
1940 65 and 6 months
1941 65 and 8 months
1942 65 and 10 months
1943 – 1954 66
1955 66 and 2 months
1956 66 and 4 months
1957 66 and 6 months
1958 66 and 8 months
1959 66 and 10 months
1960 and later 67

For purposes of this chart (both determining the year of birth and the month in which full retirement age is reached), people born on the first day of a month are treated as if they were born at the end of the preceding month.

Understanding the Social Security Benefit Calculation

The retirement benefit you’ll receive if you retire at your full retirement age is called your primary insurance amount (or PIA). Most of your other benefits (and benefits your family members receive based on your earnings) are determined relative to your PIA. For example, if you take early retirement, your benefit will be a reduced percentage of your PIA.

The calculation of PIA is somewhat complicated, and few people will want to actually calculate their own number. Yet it’s useful to have a general idea how your PIA is generated. This article provides an outline of the calculation. A later article explains how an additional year of earnings will affect your benefit.

In a nutshell: The calculation looks at your entire earnings history with inflation adjustments, chooses the 35 best years and finds your average indexed monthly earnings for those years. Then it applies a formula that typically comes to somewhere between 25% and 45% of this inflation-adjusted average.

Step 1: Taxed Social Security Earnings

The first step is to find your taxed social security earnings for every year in your work history, beginning with the year after the year you turn 21. You should receive a statement with these amounts each year beginning at age 25. Note that the calculation only includes earnings that were subject to social security tax. For example, if you earn $100,000 in 2005, your taxed social security earnings for that year will be $90,000, because that is the maximum amount on which you have to pay social security tax for that year.

As always in the social security system, earnings are wages and net earnings from self-employment. Other types of income, such as investment income, are not included.

Step 2: Inflation Adjustment

Next, increase the earnings for earlier years to reflect inflation. For example, $10,000 you earned in 1977 would be equivalent to $34,000 earned in 2002. Each year has its own inflation adjustment: you would get a bigger adjustment for wages earned in 1976 and a smaller inflation adjustment for wages earned in 1978. As a result, this part of the calculation requires a table of inflation adjustments — and the table itself changes each year.

The indexing year is normally the year you turn 60, even if you start receiving benefits at age 65 or later. If you die or become disabled before age 62, the indexing year will be two years before the year of your death or disability.

Step 3: Select the 35 Highest Years

Next, select the 35 highest years based on the inflation-adjusted amounts. If you earned $10,000 in 1977 and $30,000 in 2002, your earnings for 1977 would rank higher because they are equivalent to $34,000 in 2002 earnings. If you don’t have 35 years with earnings, the calculation will include some years at zero earnings.

Step 4: Find the Monthly Average

Next, add up all the inflation-adjusted amounts for the 35 years that were selected and divide by 420 (the number of months in 35 years). In the world of social security, this is known as your average indexed monthly earnings (AIME).

The calculation uses a smaller number of years for someone who dies or becomes disabled before age 62.

Step 5: Apply the Benefit Formula

A three-tiered benefit formula determines a monthly benefit based on your AIME. It is designed to replace a higher percentage of earnings for people at lower levels. At higher levels of earnings the formula provides higher benefits, but the percentage of the benefit relative to AIME declines.

The earnings levels where percentages change are called bend points because a graph of the benefits would have a bend in the line at those points.

The formula provides 90% of AIME up to the first bend point, 32% from there up to the second bend point, and 15% above the second bend point. Bend points are adjusted each year for inflation. For workers retiring in 2005, the bend points are $627 and $3,779. Note that these are applied to your monthly earnings, so they correspond to annual income 12 times that amount ($7,524 for the first bend point and $45,348 for the second bend point).

Example 1: Your AIME is $2,844. If you retire in 2005 your PIA would be  .9(627) + .32(2,844 – 627) = $1,273.74 (before rounding). This is the monthly retirement benefit you receive if you retire at full retirement age.

Example 2: Your AIME is $3,985. If you retire in 2005 your PIA would be .9(627) + .32(3,779 – 627) + .15(3,985 – 3,779) = $1,603.84 (before rounding).

The practical impact of this formula is that a worker with lower wages might expect to receive a social security benefit that replaces about 45% of those wages on an inflation-adjusted basis, assuming the worker retires at full retirement age. A worker with much higher earnings will receive a larger social security benefit, but it may replace only about 25% of covered wages.

Earnings that are above the social security wage base ($90,000 for 2005) don’t count in the formula. If your earnings are significantly above that level, your social security benefit will replace a much smaller percentage of your wages.

Caution

The discussion here deals with the main rules for calculating your primary insurance amount. It omits special rules that can apply in various circumstances, such as a reduction in benefits that can apply when you earn a retirement benefit while performing work that isn’t covered by social security.

Social Security Change When You Work an Additional Year

In general, you need 10 years of substantial earnings to qualify for a retirement benefit under social security. (You also have to be over 62 years of age and file an application.) Working additional years can qualify you for a higher benefit, even if you’re already receiving social security retirement benefits. The amount of added benefit can vary greatly, though, depending on your work history. Because of the way the social security benefit calculation works, you may get a big boost in your benefit, a small boost, or no boost at all. There are two main factors here:

  • How do the earnings in the additional year compare with the lowest year that would otherwise count in your calculation?
  • Are your average indexed monthly earnings above the second bend point?

Naturally, there are many other factors that may be equally important in determining whether you want to continue working (or return to work). We’re just looking at one issue: how it will affect your social security retirement benefit.

The discussion on this page will be easier to understand if you have read this page about how your retirement benefit is calculated.

No Reduction in Benefit

Having another year of earnings won’t reduce your retirement benefit. You don’t have to worry about dragging your average down, because your retirement benefit is always calculated on the basis of the 35 highest years, determined after applying inflation adjustments. Your additional year will go into the formula only if it would bring your average up, not if it would bring your average down.

Example 1: You’ve worked 33 years with earnings at a high level, and now you’re going to either work part time with a low level of earnings or stop working altogether. The calculation takes 35 years into account even though you worked fewer years. That means the formula includes two years with zero earnings. By working part time, you’ll replace a year of zero earnings with a year that has at least some earnings, and your social security retirement benefit will increase.

Example 2: You’ve worked 35 years with earnings at a high level, and now you’re going to either work part time with a low level of earnings or stop working altogether. If you work part time and have earnings lower than the lowest year in your prior history, the additional year will be ignored because it isn’t one of the 35 highest years. It won’t increase your benefit, but it won’t reduce your benefit, either.

If you have earnings during a year when you’re receiving early retirement benefits, the earnings test can cause a reduction in your social security benefits for that year. This will not affect your permanent benefit, however.

Replacing Years of Zero Earnings

As you can see from the examples above, you get an increase in your social security retirement benefit only if your additional year of earnings replaces a year when the earnings were smaller. You can be sure this is the case if your prior history includes fewer than 35 years of earnings, because that means your additional year of earnings will replace a year of zero earnings.

Example: Looking at the annual statement you receive from the Social Security Administration, you see that you have fewer than 35 years with earnings that count toward your retirement benefit. You are considering working an additional year when you expect to earn $42,000.

With fewer than 35 years of earnings, the benefit calculation will include some years of zero earnings. Working the additional year will increase your total by $42,000. Divide by 420 (the number of months in 35 years) to determine that your average indexed monthly earnings will increase by $100.

We still have to apply the benefit formula to see how this $100 increase in AIME will affect your benefit. We’ll get to that later.

Replacing Years of Low Earnings

If you have at least 35 years of earnings, it may be difficult to tell how much advantage you’ll get from working another year. We would need to apply an inflation adjustment to each of the earnings amounts to find out which are the 35 highest years. Then we would have to identify the lowest year out of the 35 highest, because that is the year that will be replaced if you have an additional year with higher earnings. It’s possible to work this out if you can locate the applicable inflation adjustments on Social Security Online, but it’s beyond the scope of this discussion to work through all the details. Here’s an example of how it might work out:

Example: You determine that your 35 highest years include 34 years with steady (and steadily increasing) earnings, plus one year you went back to school for additional training. You worked only a few months that year, earning $6,000. That was 25 years ago, and the relevant inflation adjustment indicates this is equivalent to $13,500 dollars today. If you work an additional year, earning $42,000, you’ll replace a year valued at $13,500 with a year valued at $42,000, for an increase of $28,500. Divide by 420 to get an increase of about $68 in your average indexed monthly earnings.

The preceding examples show that two different people with the same amount of earnings in an additional year of work can see a different impact on their benefit calculation. You get more bang for your buck when you’re replacing a year of zero earnings than when you’re replacing a year that had at least some earnings that count in the calculation.

The Benefit Formula

So far we’ve considered only the way your added earnings will affect average indexed monthly earnings (AIME). We have to apply the benefit formula to see how the increase in AIME will affect your benefit.

That formula provides benefits in three tiers. As a practical matter, anyone who is thinking about this issue of how an additional year of work will affect social security benefits is in either the second tier, where the 32% rate applies, or the third tier, where the 15% rate applies. People in the second tier get more than twice as much benefit from an increase in AIME as people in the third tier.

Example 1: Based on your earnings history, your retirement benefit is calculated at $1,000 per month. Working an additional year will add $42,000 to your earnings, increasing your AIME by $100. You are in the second tier, where the 32% rate applies, so the result will be a benefit of $1,032 per month.

Example 2: Based on your earnings history, your retirement benefit is calculated at $1,600 per month. working an additional year will add $42,000 to your earnings, increasing your AIME by $100. You are in the third tier, where the 15% rate applies, so the result will be a benefit of $1,615 per month.

The increase of $15 per month in example 2 may not seem like much, but you should bear in mind that it applies every month for the entire period you receive social security retirement benefits, and it will be adjusted for inflation over the years. It’s likely to provide you with many thousands of dollars in additional benefits. Yet the increase of $32 per year in example 1 is more than double that amount. In a borderline case, that would be a much stronger incentive to work an additional year.

Finding Your Tier

One way to find out which tier you’re in is to determine your AIME, and see if it’s above the second “bend point” in the benefit formula. (Bend points are explained in Step 5 on this page.) Unfortunately, it isn’t easy to determine your AIME, because the process involves inflation adjustments to numbers throughout your earnings history.

There’s an easier way, though. Based on the numbers in effect in 2005, you would have a benefit of about $1,570 at the top of the second tier. If your estimated benefit at full retirement age is at or above that number, you can expect additional earnings to fall into the third tier and produce the smaller 15% increment. Below that level your additional earnings will fall in the second tier and produce the larger 32% increment.

If you’re using the estimated benefit from the annual statement you receive from the Social Security Administration, make sure you’re looking at the benefit you would receive at full retirement age (even if you plan to retire early). Also, you have to take into account any additional earnings that are assumed in the statement. They assume you’ll continue earning at the same rate as in your most recent year. If their calculation already assumes you’ll make $42,000 next year, you won’t see an increase in the full retirement benefit when you actually earn that amount because it was already assumed in the estimate. In this situation, working the additional year will prevent a decrease in the benefit relative to the estimate.

Choosing When to Start Receiving Social Security Retirement Benefits
You can start your benefits any time between age 62 and age 70, receiving a larger benefit if you delay.

The social security program allows you to begin receiving benefits the month after you reach age 62, or to wait until your full retirement age, or even later. The longer you wait, the fewer checks you’ll receive. But the checks will be bigger if your wait (up to age 70), so a delay will produce a greater total benefit if you live long enough. The decision about when to start taking your benefits is partly a gamble on how long you’re going to live and partly a matter of economic circumstances and personal preferences.

Choose Any Month

Once you qualify for retirement benefits, you can choose to start them any month. Your starting date doesn’t have to be at age 62 or at full retirement age. The amount of reduction for starting your benefit early (or increase for starting your benefit late) is calculated in small monthly increments, so that the benefit you’ll get starting in one particular month is not much different than the benefit you would get starting the month before or the month after. Apart from the operation of the earnings test, discussed next, there isn’t any point where you’ll see a sudden dramatic change by waiting one more month.

Earnings Test

The earnings test may reduce your benefit during the period before you reach full retirement age if you have significant earnings during that period. If you’re thinking about starting your retirement benefit before full retirement age while still working, you should take this factor into account. The reduction in benefits from the earnings test applies only to the years you have the earnings, and only until you reach full retirement age.

If your benefit is reduced as a result of the earnings test, the Social Security Administration will recalculate your benefit upward when you reach full retirement age. In other words, you get credit for the fact that you didn’t receive your full benefit, so these dollars are not necessarily lost forever.

Break-Even Point

The reduction you must accept when you take your benefit early is a permanent reduction. For example, if you take your retirement benefit 3 years early, the benefit will be 80% of the amount it otherwise would have been, not just for those three years, but for the rest of your life. You receive three additional years of benefits (that’s 36 more monthly payments than you would have received), but all your payments will be smaller, both before and after full retirement age. If you live long enough, the larger payment you’ll receive if you retire later will catch up with the smaller but more numerous payments you’ll receive if you retire earlier. The point when the total benefit you get is the same either way is the break-even point.

Let’s look at an example where your monthly benefit is $1,000, and you decide to take your benefits 3 years early. Your twin has the same monthly benefit but waits until full retirement age. You both have the same earnings history, and you both stop working at the same age, so the only difference in this example is the date you start to receive social security retirement benefits.

  • After three years of benefits you’ve received 36 payments, but they were reduced 20% so the payments were $800 each, for a total of $28,800. So far, your twin has received nothing at all, so you’re $28,800 ahead of your twin.
  • After one more year you have another $9,600 in benefits, but your twin received $12,000 in that time span. You’re still ahead of your twin, but you lost $2,400 of your advantage.
  • Every year after that you lose another $2,400 of your advantage until you reach a break even point, 15 years after your benefits began (or 12 years after your full retirement age). At that point, you and your twin have received the same number of dollars.
  • After that, your twin pulls ahead by $2,400 a year, from that point until the end of your life. For example, if you and your twin end up living 20 years after the date you start receiving benefits, your twin will end up receiving $12,000 more in total retirement benefits than you (five additional years times $2,400 per year).

As a result, you might consider starting to receive social security retirement benefits now if you think you have less than 15 years to live, and lean more toward waiting if you think you have more than 15 years to live. There are other factors to consider, of course, and we’ll get to them shortly.

Effect of Waiting

Before we move on, let’s see how the situation would change in the above example if you wait another year and one-half to begin receiving benefits, so that you’re starting just 18 months before full retirement age instead of three years early. What happens if you and your twin (who starts to receive benefits at full retirement age) live to the same age as in the previous example?

  • Your break-even point will be 18 months later. As a result, your twin will be pulling ahead of you for only 42 months, not 60 months as in the previous example.
  • Your benefit adjustment is 10%, not 20%. That means your twin gains $100 per month on you, not $200 per month. The total shortfall at the time of your death is $4,200, far less than the $12,000 in the previous example.

What we learn from this example is that a delay in starting your benefit reduces the risk of having a large shortfall if you have the “bad” luck to live a long time after your benefits start. If you don’t have an immediate need for the money and think you may survive a long time, you should think twice before starting benefits early.

Time Value and Inflation Adjustments

We determined the break-even point and the shortfall above without taking into account the time value of money: dollars you receive today are worth more than dollars you receive later. We have the luxury of figuring the break-even point this way because social security benefits are adjusted for inflation. The benefits you receive 20 years from now will be paid in “smaller dollars,” but you’ll also receive more dollars due to the inflation adjustment. You might say the time value of money is greater than the inflation adjustment, because you should be able to invest money in a way that provides an investment return greater than the rate of inflation. You’re free to make that assumption and take it into account in your decisions, but we’re keeping things simple by assuming that the time value of money is the same as the inflation adjustments. Using that assumption, the simple calculation described above provides us with a true break-even point.

Finding the Break-Even Point

The break-even point for starting benefits early or late, as opposed to starting them when you reach your full retirement age, depends on when you decide to begin receiving benefits:

  • If you begin receiving benefits more than three years before your full retirement age, the break-even point will be about 12 years (144 months) after you reach full retirement age.
  • If you begin receiving benefits three years or less before your full retirement age, the break-even point will be 15 years (180 months) after you begin receiving benefits.
  • If you delay receiving benefits for a period of time after your full retirement age, the break-even point depends on what year you reached age 62. See this page for details on the adjustment in your benefits if you think you may want to delay the start of your benefits even after reaching full retirement age.

Notice that the first rule above gives the number of months after full retirement age, and the second rule above gives the number of months after benefits begin. Both rules give the same result if your benefits start exactly three years before your full retirement age, because 15 years after the benefits begin is the same as 12 years after you reach full retirement age. As pointed out earlier, there is never a point where you see a sudden dramatic change by waiting one additional month.

Comparing Your Life Expectancy

Once you know the break-even point, it may be useful to know how that compares with your life expectancy. Many people underestimate their life expectancy in their later years. It may surprise you to learn that males who reach age 65 live another 16 years on average, and a woman at age 65 can expect to survive another 19 years. See this page for more about life expectancy, and a link to a table on Social Security Online.

What you’ll find is that if you rely solely on these tables, men have a small incentive to wait (their life expectancy is somewhat beyond the break-even point) and women have a larger incentive to wait (their life expectancy is quite a bit beyond the break-even point). You may want to adjust for factors indicating you’re likely to live longer or shorter than the average person your age.

Other Factors

So far we’ve been looking at the economic analysis as if your only concern is to maximize the total benefit you get from the system. This approach might make sense if you’re well fixed financially, with enough money to cover all your likely needs so that the only concern is how much will be left for your children. Many people have other concerns. They may not be able to bear the thought of working another three years, and find that the only way out of that is to start taking social security retirement benefits before reaching full retirement age. Or they may simply feel it’s important to have more money available now, when they’re young enough to enjoy it. These are valid considerations, and only you can decide how much they should affect your decision. Understanding the economics of the decision can help you make an informed choice, but the economics don’t have to control your life.

Earnings Test for Early Retirees

Social security lets you choose to begin taking your retirement benefit as early as age 62 instead of waiting until your full retirement age. If you do, you’ll have to accept a reduced benefit. In addition, you’ll have to deal with the earnings test for early retirees (sometimes called the retirement test). If your earnings are too high during the period before you reach full retirement age, your benefit for that year may be reduced.

Starting with the month you reach full retirement age, you can earn as much as you want without having a reduction in benefits, even if you chose to start your benefits before full retirement age.

If your benefit is reduced as a result of the earnings test, the Social Security Administration will recalculate your benefit upward when you reach full retirement age. In other words, you get credit for the fact that you didn’t receive your full benefit, so these dollars are not necessarily lost forever.

What Are Earnings?

This rule applies only to earnings as defined for purposes of social security. That means it applies to wages from your job (including bonuses, commissions and vacation pay), and also applies to net earnings from self-employment. It doesn’t apply to pensions, annuities or investment income. You can have an unlimited amount of income other than earnings without a reduction in benefits under the earnings test.

Wage earnings count in the year earned, not the year paid, so if you receive a bonus or vacation pay this year that was earned in an earlier year, it will count for the earlier year. Self-employment earnings generally count in the year received, even if earned in an earlier year.

Benefits of self-employed individuals may be reduced on the basis of the self-employed individual performing “substantial services” even if earnings are not above the stated threshold.

Earnings Test Regular Rule

The regular rule for the earnings test applies if you are receiving retirement benefits for the entire year, and you are below full retirement age for the entire year. The amount you can earn without a reduction in benefits is adjusted each year for inflation. For recent years, the amounts are given in the following table:

Social Security Earnings Test
General Rule
Year Amount
2003 11,520
2004 11,640
2005 12,000
2006 12,480
2007 12,960
2008 13,560
2009 14,160

If your earnings go over this amount for any year before the year you reach full retirement age, your social security benefit is reduced by one dollar for every two dollars you are over the limit.

Example: You decide to begin receiving social security benefits in 2004, but you will not reach full retirement age until 2006. During 2005 you have earnings of $14,400.

Your earnings are over the limit by $2,400. This rule reduces your benefit by half of that amount, so your benefit for 2005 would be reduced by $1,200 ($100 per month).

Earnings Test in the First Year

If you start receiving social security retirement benefits in a month other than January, the earnings test will apply on a monthly basis for the first year of benefits. For example, you could begin receiving benefits in July after earning $30,000 during the first six months of the year. Your earnings would not be reduced, even though your total earnings for the year are over the limit, if your earnings for each month after you begin receiving benefits is less than the monthly amount ($1,180 per month in 2009).

Earnings in the Year You Reach Full Retirement Age

A more generous rule applies in the year you reach full retirement age. The limit is much higher, and it applies only to earnings during the months before you reach full retirement age. Furthermore, if you go over the limit, the reduction in benefit is $1 for every $3 over the limit, instead of every $2 over the limit (the general rule). The dollar amount for this rule is adjusted each year for inflation. For recent years, the amounts are given by the following table:

Social Security Earnings Test
Year of Full Retirement Age
Year Amount
2003 30,720
2004 31,080
2005 31,800
2006 33,240
2007 34,440
2008 36,120
2009 37,680

These are annual amounts. Divide by 12 to determine the amount that can be earned per month before the month in which you reach full retirement age.

Earnings After Your Reach Full Retirement Age

Beginning with the month in which you reach full retirement age, you can earn as much as you like without a reduction in benefits. Prior to 2000, the earnings test applied until a later age, but now it applies only until you reach full retirement age.

Social Security Reduction for Early Start
Your retirement benefit is permanently reduced if you decide to start receiving it before reaching full retirement age.

People who qualify for social security retirement benefits can begin receiving those benefits in the month after they reach age 62, or any month after that, even though they won’t reach full retirement age for a few more years. If you choose to receive retirement benefits before your full retirement age, the amount of the benefit will be reduced. To receive the full benefit, you have to wait until your full retirement age to begin receiving benefits. Your full retirement age depends on when you were born, as explained here.

If you decide to start your benefits early, the reduction will be 5/9 of 1% for every month, up to 36 months early. That works out to 6.67% per year.

People born after 1937 have a normal retirement age of more than 65 years (see the table on this page). They’re still allowed to start their benefit at age 62, so they can have a benefit that starts more than 36 months early. In this case, each additional month will reduce the benefit by 5/12 of 1%, which works out to 5% per year. The maximum number of months early would be 60 (five years), but this applies only to people born after 1959. If you were born before 1960, your maximum number of months of early benefits is smaller. The following table provides your benefit at a percentage of the regular benefit (PIA) depending on the number of months you retire early.

Early Retirement Percentage
Months early Benefit percentage
6 96.67
12 93.33
18 90.00
24 86.67
30 83.33
36 80
42 77.5
48 75
54 72.5
60 70

We used six-month increments for convenience. The benefit percentage will be determined by the exact number of months (but not fractions of months).

Example: Suppose your normal benefit works out to $1,425 per month. You decide to begin receiving benefits 7 months early. Your benefit percentage will be 96.11% (100% reduced by 7 times 5/9 of 1%). Your monthly benefit will be $1,370 (96.11% of $1,425).

Social Security Increase for Late Start
You can receive an increased benefit if you delay the start of payments past your full retirement age.

You can choose to start receiving social security retirement benefits any month after the month you reach age 62. If you start receiving benefits before your full retirement age, the benefit will be reduced, as explained here. If you start receiving benefits the month after reaching full retirement age, you’ll receive the full benefit. Yet you can receive an increased benefit by delaying the start to a later month, up to the month after you reach age 70. After that, there is no further increase for delaying the start of your social security benefit.

At one time, there was very little economic incentive to delay the start of your benefit beyond full retirement age. The increase in the benefit wasn’t enough to make up for the fact that you receive fewer payments: you had to live past age 98 just to break even! (In those days the earnings test applied even after full retirement age, so people would consider delaying their benefits if they wanted to continue working after age 65.) Congress has changed the formula so that the break-even point comes much sooner, and some people might reasonably choose to delay starting their retirement benefits based on their life expectancy.

The amount of increase you get for delaying the start of your benefit now depends on the year you reach age 62. Don’t let that confuse you: the year you turn 62 determines what percentage applies, but you have to forgo benefits for one or more months after reaching full retirement age (which is 65 or later, depending on when you were born) to qualify for the increased benefit.

Late Retirement Increase
Age 62 in Increase per month Break-even
1995 – 1996 11/24 of 1% 218
1997 – 1998 1/2 of 1% 200
1999 – 2000 13/24 of 1% 185
2001 – 2002 7/12 of 1% 171
2003 – 2004 5/8 of 1% 160
2005 or later 2/3 of 1% 150

The break-even point is the number of months after the start of your benefit when the total of all your delayed payments will be equal to the total you would have received if you started your payments at full retirement age.

Example: You reached age 62 in 2002 and decided to delay the start of your benefits by 4 months. Your monthly benefit is increased by 2.33% (4 times 7/12 of 1%). If you live long enough to receive 171 benefit payments (a little over 14 years), you’ll have received the same total amount as if you started your payments at full retirement age. If you live beyond that age, your total benefits will be greater than if you started to receive payments at your full retirement age.

Note that the break-even point for people born after 1942 is only 12½ years after the date benefits start, which is considerably shorter than average life expectancy at full retirement age. As a result, the average person in that age group will receive a greater total benefit if he or she delays the start of benefits for a period of time after reaching full retirement age.

Understanding Life Expectancy
Your life expectancy changes as you grow older, so you may have more time left than you think.

Knowing your life expectancy can help you make informed decisions about retirement in general, and social security benefits in particular. Many people underestimate their life expectancy because they don’t realize it changes as they grow older.

Basic Life Expectancy

We sometimes hear statistics about what might be called basic life expectancy. This is simply the average age at which people die. Find the ages of all the people who died in a relevant period, add them together and divide by the number of people, and you have life expectancy. The actual process is more complex, but that is the basic idea.

Life Expectancy at a Later Age

Your life expectancy changes as you grow older because the formula leaves out the people who died at ages younger than your current age. For example, if we’re trying to determine your life expectancy at a time when you’re 50 years old, we don’t average in the numbers for people who died before reaching age 50. At this point we’re asking what is the average number of years people live beyond age 50, once they’ve reached that age. That’s a higher number than the average for all people, because we’re eliminating people who died when they were younger. Here are some numbers from this table on the web site of the Social Security Administration:

Life Expectancy
Male Female
At birth 74.0 79.4
Age 50 27.6 31.6

You can see that a male at birth is expected to live to an average age of 74, but having reached age 50 he is expected (on average) to make it to age 77.6.

Gaining Ground

At age 50 you haven’t gained much ground in the life expectancy sweepstakes. The average date of death for people who reach that age isn’t much later than for all people in general, because it’s a small minority of people who die before that age. As you move into later years, you gain ground more rapidly, because you’re surviving past years when a larger number of people died. At age 65, a male is expected to survive almost 16 more years, to about age 81, and a female almost 19 more years, to about age 84.

Some people are surprised by these numbers. All their lives they heard about life expectancies somewhere in the 70’s, so at age 65 they figure the odds of living another decade aren’t very good. In reality, at age 65 the average male can expect to survive past his 80th birthday, and the average female even longer.

It can be a big mistake to plan your retirement around the idea that you’re going to die in your 70’s.

You Aren’t Average

You aren’t the average person, of course, and you can’t count on living as long as the tables say, no matter what your current age. The tables are based on the broad population, including smokers and non-smokers, marathoners and couch potatoes, and people with all sorts of good and bad indications for longevity. You may get a more realistic picture if you adjust what you read in the tables based on knowledge of your own factors.

Playing the Odds

In any event, you have to allow for good or bad luck. Some people plan to run out of money when they die, but forget to die on schedule. Make sure your needs will be covered even if you live longer than you might expect based on the life expectancy tables and your own health factors.

Life Expectancy

You don’t know how long you’re going to live, of course, but it may help to know the average life expectancy of people your age. You can find that in this table on the web site of the Social Security Administration. The numbers there tell us that the average person does better by waiting until full retirement age. For example, a 63-year-old male has a life expectancy of 17.25 years. If a man with a full retirement age of 66 begins his benefit at age 63, he can expect (on average) to live 27 months (two and one-fourth years) past the break-even point, when the later benefit catches up with the earlier benefit. His twin (the one who waits until full retirement age to begin benefits) comes out better. For a woman, the difference is greater. Her life expectancy at age 63 is about 20.5 years, giving her 66 months (five and one-half years) after the break-even point.

For the average person, the choice to start receiving retirement benefits early will ultimately mean receiving a smaller total lifetime benefit. If you have reason to believe your personal life expectancy is shorter than average, you may come out better by starting your benefit early, especially if you’re a male. People with average or better life expectancy, especially females, should think twice about starting the benefit early. You may still want to make that choice for other reasons, such as having money to travel while you’re young enough to enjoy it, but the long-term consequences of that decision won’t be favorable if you live far beyond the break-even point.

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