What you need to know before retiring in the US: 4 important numbers for calculating your welfare
Are you thinking about getting Social Security benefits? The decision to file your first check can be hard to reverse and can affect the income you receive each month and for the rest of your life. The Motley Fool.
Before you start claiming retirement benefits, there are four numbers you need to know to make sure you're doing it right.
If you are thinking about applying for Social Security, you need to know when your full retirement age is and you also need to know how much income your benefits will generate. Accounting for your spouse is also important. Let's take a closer look at these important points.
1. Your full retirement age
Knowing your full retirement age (FRA) is critical because the FRA—along with the age at which you start receiving payments—determines how much income Social Security will actually provide.
Each pensioner has a primary insurance amount (PIA). Your calculation is based on the average wage. But the catch is, you won't get a PIA unless you start receiving your first Social Security payment exactly at your full retirement age.
If you choose to file at a different time:
- You may face early filing fees. For each of the first 36 months you receive a pre-FRA check, these penalties reduce your PIA by five ninths of 1%. This results in a reduction in benefits of 6,7% for each year of prepayment during the first three years before the FRA. If you retire more than 36 months early, the applicable early filing penalties for additional months are five twelfths of 1%. This is an additional reduction in benefits of 5% per year.
- You can earn deferred retirement credits. For every month you wait to receive your first check before the end of the FRA, your PIA increases by two-thirds of 1%. This increases the annual income by 8%.
You need to know your FRA so you can decide when your application time is right for you and so you can understand how your choice affects your income.
The year of birth and full retirement age are shown below:
- 1956 - 66 years and 4 months;
- 1957 - 66 years and 6 months;
- 1958 - 66 years and 8 months;
- 1959 - 66 years and 10 months;
- 1960 - 67 years and older.
2. Years of your work
The number of years you have worked in your job is also important to know before you decide it's time to claim benefits. This is because by working too few years, you can make less profit.
You see, Social Security benefits are based on average wages, but over a period of time. Specifically, the wages used to determine your average are for the 35 years your wages were higher.
If you have less than 35 years of service, the same formula is still used to calculate your benefits. But the problem is that in some years the $0 salary ends up being included in your average salary, thus lowering it and reducing your benefit.
You must ensure that you have worked for at least 35 years before retiring.
3. Your Standard Benefit
The amount of basic insurance you get when you reach full retirement age is also sometimes called your standard benefit. You can find out what you have by logging into your account mySocialSecurity.
It's worth taking a look at your standard benefit before you decide it's time to apply for Social Security. Once you do, you may find that it is much lower than you would expect if you were counting on Social Security as your main source of income.
The bottom line is that your Social Security retirement benefits are meant to replace about 40% of what you earned at work. You won't be able to live on them alone, so you need to be prepared for this reality and make sure you have enough income from other sources to cover any additional expenses that Social Security benefits won't pay for.
4. Your spouse's standard allowance
Finally, you must find out how much Social Security benefits your spouse will be entitled to. This is because you and your partner may want to work together to decide who should claim benefits at what specific time in order to maximize your total lifetime income.
If your spouse will receive very little or no benefits based on their own years of service, they may want to claim spousal benefits. They cannot run until you receive your own benefits, so this may change when you start receiving your payouts.
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If you had a higher income, you can also delay the start of your Social Security payments, as this can increase the amount of survivor benefits your lower-income spouse would have received if you had died first.
Obviously, there is a lot to think about when it comes to receiving Social Security benefits. So make sure you know all four answers to make the right choice for you and your family.
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