Full retirement age, or FRA, is the age at which you qualify to claim full Social Security retirement benefits and is based on your birth year. If you retire prior to your FRA, this will result in a reduction of your Social Security benefit. If you retire after your FRA, this will result in an increase in Social Security benefits.
Full retirement age not only affects the amount of monthly benefits you receive, but also determines what will happen to your Social Security benefits if you work and earn income after claiming them. If you work prior to full retirement age, this could reduce Social Security benefits.
If you work during the year you reach your full retirement age, benefits could also be reduced but are less likely to be.
If you have already reached full retirement age, you can work as much as you want and Social Security benefits will not be affected.
Because full retirement age can make a major impact on the lifetime income you receive from Social Security, it’s important to understand what your full retirement age is and how your benefits will change depending when you claim them in relation to FRA. This guide explains everything you need to know.
What is full retirement age?
Full retirement age depends on the year when you were born. The table below shows your full retirement age based on the year of your birth.
If you were born on Jan. 1, your full retirement age will be determined as if you were born in the prior year. And if you were born on the first of any month, your full retirement age and benefits are calculated as if your birthday was in the month prior. If you were born on Jan. 1, 1960, your full retirement age would be determined as if you were born in 1959, so your full retirement age would be 66 years and 10 months.
How has the retirement age changed over time?
Full retirement age used to be 65. The 1935 Social Security Act that created the Social Security benefits program set 65 as the age at which a retiree could claim full benefits. However, in 1983, Social Security Amendments were signed into law. The amendments slowly raised full retirement age from age 65 to age 67. Congress justified the change based on increasing average life expectancy. Since people were living longer, Congress argued they could retire later.
- Why does full retirement age matter?
It determines the minimum age at which you become eligible to receive your full Social Security benefit. Your full Social Security benefit, or primary insurance amount, is calculated based on a percentage of average wages, adjusted for inflation, that you earned over the 35 years in which your income was the highest. - It entitles you to work while receiving Social Security benefits without seeing any reduction in income, no matter how much you earn. Earning too much from working before FRA could reduce monthly Social Security benefits if you claimed benefits already — although you get credit for this reduction and will receive higher benefits later.
The reduction in benefits that can result from claiming Social Security before FRA is substantial and permanent. Depending how early you retire, you could see your monthly benefit reduced by as much as 30% of what you’d have received had you waited until FRA. On the other hand, you could see your monthly benefit increased by 8% per year you delay claiming benefits after hitting FRA and up until you hit age 70.
What happens if you claim Social Security benefits before full retirement age?
If you claim benefits prior to full retirement age, here’s what happens to your benefits:
- For the first 36 months before FRA, benefits go down by 5/9 of 1% per month
- For each additional month prior to 36 months before FRA, benefits go down by 5/12 of 1% per month
In each of the first three years before FRA, benefits will be reduced by around 6.67% based on this formula. And if you retire more than three years prior to FRA, benefits go down by an additional 5% per year. This means if your full retirement age is 67 and you instead retire at 63, you are retiring four years — or 48 months — before FRA. To determine how much your benefits are reduced you would:
- Multiply 36 times 5/9 of 1%. This will give you the reduction for the first 36 months. The math looks like this: 36 x ((5/9) x 0.01) = 0.20
- Multiplying 12 times 5/12 of 1%. This will give you the reduction for the earlier 12 months. The math look like this 12 x ((5/12) x 0.01) = 0.05
Add 0.20 + 0.05 together to discover that your benefits are reduced by 0.25, or 25%. You could also:
- Multiply 3 years times a 6.7% annual reduction = 20% reduction for the first three years early
- Multiply 1 year times a 5% reduction = 5% reduction for the fourth year you claimed before FRA
Add 20% + 5% together to see the same 25% reduction using this calculation.
How much would claiming Social Security before full retirement age reduce your Social Security benefit?
If you don’t want to do the math, just use the table below to see how claiming Social Security before full retirement age could reduce the benefit you receive:
Here’s how this works in practice. Say your primary insurance amount, or the benefit you’d receive at full retirement age, would be $1,500. Here’s what would happen to your benefit if you retired at different ages.
You can see how much of an impact your full retirement age makes. If FRA is 66 and you retire at 65, your benefit is only reduced by $100.50 per month or $1,206 per year. But if your full retirement age is 67 and you retire at 65, your benefit is reduced by $199.50 or $2,394 per year.
What happens if you claim benefits at full retirement age?
If you claim benefits at your full retirement age, you will receive your primary insurance amount. This is calculated by taking the following steps:
Step 1: Determine your AIME
AIME is your average indexed monthly earnings. SSA looks at your earnings over your working life and adjusts them for inflation using the national average wage indexing series.
After adjusting for inflation, the SSA takes the average of your wages in the 35 years when you earned the most and divides by 12 to get your monthly average. Wages are counted only up to the maximum amount of income subject to Social Security tax. In 2019, for example, you pay tax only on the first $132,900 in earnings so no income above this is factored into the AIME calculation.
Step 2: Add up different percentages of AIME depending on earnings
You get benefits equal to:
- 90% of your AIME up to a certain income threshold
- 32% of AIME between the first income threshold and a second income threshold
- 15% of AIME above the second income threshold
These income thresholds are called bend points and they change each year based on the national average wage indexing series. For 2019, the bend points are $926 and $5,583. So, if you had an AIME of $6,200, your benefits would equal
- 0.90 x 926 +
- 0.32 x ($5,583-$926) +
- 0.15 x ($6,200-$5,583)
This adds up to $2,416.19.
The bend points used to determine your benefits are those in effect when you turn 62, regardless when you actually retire. Your AIME can change if you earn more wages after 62, as those wages could be factored in when your average is determined — but your bend points will not change.
Step 3: Account for in any cost-of-living adjustments if you retire after age 62.
If you retire at a full retirement age of 67, the primary benefit amount as determined using the bend points from when you turn 62 would be adjusted upward if Social Security recipients received any cost-of-living adjustments during the five years between when you turned 62 and when you turn 67.
Cost-of-living adjustments are determined each year using the Consumer Price Index for Urban Wage Earners and Clerical Workers, which is calculated by the Bureau of Labor Statistics.
If you retire at exactly full retirement age, you will receive the primary insurance amount determined using this calculation. If you retire before, benefits are reduced as described above. If you retire after, benefits are increased as described below.
What happens if you claim benefits after full retirement age?
If you claim benefits after full retirement age, your primary insurance amount increases as you earn delayed retirement credits. You cannot increase your benefits any further after the age of 69, so there is no point in waiting to claim benefits once you have hit 70. However, between FRA and the age of 70, benefits increase for each month that you wait to claim them. If you were born in 1943 or later, benefits increase by a total of 2/3 of 1% per month you delay your claim for Social Security benefits after FRA. So, if your FRA is 67 and you retire at 68, you would calculate your benefit increase by:
- Multiplying 2/3 of 1% times 12 months. The math looks like this: ((2/3) x 0.01) x 12 = 0.08.
Using this formula, your benefits go up by a total of around 8% per year for each year that you wait to claim them after full retirement age.
How much would claiming Social Security after full retirement age reduce your Social Security benefit?
If you don’t want to do the math, the table below shows much you could increase your Social Security benefits by waiting until after full retirement age to retire.
If your primary insurance amount at full retirement age was $1,500, here’s how these delayed retirement credits could affect the benefit amount you receive.
Delaying your claim for benefits until after FRA could have a big impact. If your full retirement age is 67 and you wait until the age of 70 to claim benefits, your annual income from Social Security could be $4,320 higher than it would have been if you’d taken your benefits at 67.
What’s the maximum you could increase Social Security benefits by retiring after full retirement age?
The amount of delayed retirement credits you can receive is capped because benefits stop increasing after the age of 70. The table below shows how many months you could delay claiming Social Security benefits based on your full retirement age, as well as the increase in benefits you would receive as a result of waiting to claim Social Security benefits until age 70.
The change in full retirement age impacted how much you could increase your Social Security benefit by waiting until age 70 to claim it.
How full retirement age affects your ability to work while claiming Social Security benefits
Your full retirement age also affects your ability to work and still receive full Social Security benefits.
- If you claim Social Security benefits in any of the years before you reach full retirement age and you work after claiming benefits, benefits will be reduced by $1 for every $2 you earn above an annual income limit.
- If you claim Social Security benefits during the year you will reach full retirement age — but before you actually reach that age — benefits will be reduced by $1 for every $3 you earn above a much higher annual income limit. If your FRA is 66 and you will turn 66 in October, for example, this rule would apply to you if you worked from January through October in the year you turn 66.
- If you claim Social Security benefits after reaching FRA, you can work as much as you want without affecting the benefits you receive.
Say you claim Social Security in 2019 and are below your full retirement age for the entire year. The 2019 income limit before Social Security benefits start to be reduced is $17,640. If you earn any more than that amount, you will start to see your Social Security benefit reduced by $1 for every $2 earned. So if you earn $27,640, you would earn $10,000 over the limit and your Social Security benefit would be reduced by $1 for every $2 of that — which would result in a $5,000 reduction in annual benefits.
But if you claim Social Security in 2019 and will hit your full retirement age at some point in 2019, the rules are different. In this case, because you’re going to hit FRA during the year, you can earn up to $46,920 before you will see any of your benefits reduced. In our above example where you earned $27,640, benefits would not be reduced at all. If you earned $56,920, though, you’d be $10,000 above the limit. Benefits would be reduced at a rate of $1 per $3 earned above the limit, so you would see a benefits reduction of about $3,333.
If you claim Social Security in 2019 and are already at your full retirement age, you can work as long as you want, and you don’t have to worry about any reduction in benefits.
The good news is, if your benefits are reduced because you work after claiming them, but before full retirement age, you get credit for the benefits you didn’t receive, and your benefit is higher later.
The income limit for how much you can earn before your benefits starts to be affected can change periodically. You can find the current year’s limit on the Social Security Administration website.
Now you know what full retirement age is and why it matters
Now that you know full retirement age is and why it matters, you can decide when to retire and what you should do about working after claiming Social Security. You can make a much more informed choice, since you know a lot more about how Social Security benefits work.
— Christy Bieber
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Source: The Motley Fool