Social Security: File Early of Later?

For millions of us, a monthly check for the rest of our lives has real meaning. We’ve paid into the system for years and for better or worse, we want our promised benefits.

I have no idea if you consider yourself a “senior”. As I was passing through middle age, a “senior” was someone with grey hair, much older than I was, and was probably retired.

Using that vague definition, we know that roughly half of all ‘seniors” who happen to be married, and about 70% of unmarried “seniors”, rely on a monthly check to provide at least half their retirement income.

Some of you reading this are not yet “seniors”. Most of you have little idea how your future Social Security checks will be determined and how that amount will impact your life after you leave the workforce and start your retirement.

If you file early, it could have an enormous effect on the size of your check.

So what do we mean by early? It used to be anything before age 65, starting at age 62. An acronym used by Social Security is FRA, which stands for Full Retirement Age. Before 1983, it was age 65. They changed the formula to keep the system from running out of money.

I was born in 1941 which, according to the new formula, pushed my FRA forward to 65 and 8 months. Others, born later, saw their FRA move forward to as much as age 67. That’s the current FRA.

As it stands now, you can file as early as the month when you turn 62. Or you can wait until you’re 70. You have the right to never claim benefits, but that just means some of the money you set aside all those years could get forfeited. So from a practical point of view, waiting beyond your 70th birthday month makes no sense.

You may have figured out that there are 96 months to choose from when it comes to signing up to start receiving social security retirement benefits. Several things stand out when choosing your month to sign up.

Another acronym used by Social Security is PIA which stands for Primary Insurance Amount. That’s a dollar value determined by your earnings history. That value could change every month before you file a claim, but once you do file, it becomes fixed in stone.

If you claim before you reach your FRA, your PIA is locked in based on your work credits and associated with your FRA. If that’s a few years down the road, money you earn in those years and the % you pay into the system while you work, will not help you much.

That’s because depending on how many months there are between when you file and your FRA, a formula shrinks your monthly benefit. If you claim as soon as you reach age 62, there are 60 months between then and your FRA if you were born in 1960 or later. The shrinkage is 30%, and that lasts the rest of your life. Yes, you’ll get Cost of Living Adjustments (COLA) but they’ll apply to a smaller benefit.

Each month the % reduction gets small so that if you apply 1 month before your FRA, it will only be 0.556% instead of 30%. You can probably live with that. The formula changes a little to make it more favorable is you wait until age 65, but not much.

I used to argue that in terms of how much you get over your lifetime, it’s essentially the same regardless of when you apply. But that misses two important considerations. The first is that since your PIA is a function of the average of the 35 highest earning years prior to filing to claim benefits, it’s reasonable to expect that average to be higher if you include the last five years between age 62 and 67.

The second is that by waiting and expecting to get a larger monthly check, the annual COLAs will apply to a larger benefit amount. And that doesn’t include the fact that income taxes will more likely be applied to your benefit amount if you continue to earn money. Those tax dollars will be gone forever.

If you want or need to quit working before your FRA, you can accept the rule of thumb that you’ll ultimately get the same total benefit. You’ll just be getting smaller checks for a longer period of time. That’s because they end when you die.

But if you have a spouse who will depend heavily on Social Security when you die, if you die first and you filed early, she/he is going to get a smaller check for the rest of their lives. This is critical if your earnings history was the stronger of the two.

There are a lot of variables that go into deciding when to file. If you file and decide you made a mistake, you have a one time do over. But only one. And it has to be done within 12 months of first filing.

My recommendation is to make every effort to wait until your FRA. If you need the money sooner, and have any other retirement accounts, chances are you’ll be better off using that money first and delaying your Social Security filing until your FRA.

Right now there’s some gnashing of teeth in Washington about reducing benefits. I don’t think that will happen since there are so many millions of Americans whose life depends on what they get every month.

The last time the system was substantively fixed was in 1983. It’s now time for another. If it happens now, it need not be dramatic, provided there’s a political will to make it happen. We’re all living longer, and more and more of us are increasingly dependent on Social Security.

Tony Kendzior \ 7 JAN 2020