Your Personal Social Security Benefits
Your first step to determine your personal sweet spots is to find out what your personal benefits will be. Contact the Social Security Administration or create a log on to My Social Security and find out your PIA, your monthly Primary Insurance Amount that you will receive if you start your benefits at your NRA, Normal Retirement Age. The next step is to go to the Social Security website’s Early Late page, enter your birth date and the month and year when you plan to start your benefits. Click the Compute button and the page will tell you the percentage of your PIA that you will receive each month (COLA adjusted) for the rest of your life.
The table to the left gives you an idea of what your monthly PIA could be based on the average of the top 35 years of your inflation adjusted income on which you paid Social Security tax. It also gives you your yearly benefit level which is what is used throughout this wesite. Note how your rate of return decreases as your average income increases.
The right hand table shows how your PIA will be increased or reduced if you decide to retire early or late. Your NRA will be 66 if you were born in or before 1954, and 67 if you were born in or after 1960.
We should also look at this table from the viewpoint of the percentage of our working income that we will receive from Social Security.
There is a lot of talk about means-testing our Social Security benefits. This table illustrates how our benefits are basically already means-tested. The larger your working income the smaller the percentage of that income that you will receive as your Social Security benefit.
The Break Even conversations on most websites are very misleading. Most of the data supplied seems to assume that the individuals don’t care how they are living. So what if they have to scrimp by on $6,300 less because they started their Social Security as soon as they could. They do not consider that you will have to take an extra $7,700 out of your IRA and pay an extra $1,400 in taxes to maintain the standard of living, after tax income, which you desire!
At what age do you Break Even when you wait until age 66 to start your Social Security compared to starting as early as possible at age 62 and 1 month?
The answer is always age 78 and 1 month if you only consider 75.42% of your benefit compared to your full benefit. If you do the calculations based on your Net Federal Income after paying the additional taxes created because your desired lifestyle will require more taxable income to make up for getting less tax delayed SS income, your Break Even age will be considerably lower especially if that extra taxable income pushes you into your Personal Tax Hump.
Note: The previous example does not include the extra State and Local taxes that you are likely to pay because of your higher taxable income due to your lower Social Security benefits.
The Social Security age 62 and 66 benefit levels in this example are the same as the Federal Tax only example but, if we still want the same after all taxes Lifestyle income, we now need even more Other Income to cover our State and Local taxes. Our Gross income is higher so our Federal taxes are higher plus we are now adding CC MD, Cecil County Maryland, taxes to the example so our Net Government income after all government taxes is reduced even further. The 75.42% early / late Ratio has been dramatically reduced which results in even lower Break Even ages.
Another Example of the Benefit of Waiting
Let’s assume for this example that you are 62 and your average inflation adjusted income over your highest 35 income years was about $50,000. Your PIA would be about $1,875. Your primary insurance amount (PIA) is the monthly benefit you would receive if you elect to begin receiving retirement benefits at your normal retirement age. Your yearly benefit at that age would be about $22,500.
Now let’s examine the age 65 line of this table to see what it is saying. You waited three years to start your retirement income. Your $22,500 Full Retirement age Benefit (FRB) grew by an estimated COLA of 2.5% each year and is now $24,230. But you are retiring 2 year early so you will only get 86.67% of your PIA and your estimated annual SSB will be $21,000. Your $10,000 Pension and Annuity have each grown by different rates and when you start them at age 65 you will get annual checks of $11,910 and 12,950 for the rest of your life.
Your combined Guaranteed Income the first year of your retirement will be $21,000 that will get COLA increased each year plus $24,860 of that will remain fixed for the rest of your life for a total of $45,861.
Your compounded average 2.5% COLA increases over the next 5 year will be 13.1% which should raise your age 70 SSB to $23,760 plus your fixed Pension and Annuity of $24,860 means that your Guaranteed Income level at age 70 will be $48,620, partially COLA adjusted for the remainder of your life.
If you had started your benefit as soon as possible at age 62 and 1 month, your Guaranteed Age 70 Income level would only be $39,305; $9,315 less every year if you couldn't wait 3 more year.
If you had waited until age 70 to start everything, your Guaranteed Income level would be $69,858; $21,238 more each year if you could afford to wait 5 more year.
So, you are now 70 and your Guaranteed Annual Income without touching your 401K savings is either $48,620 or $39,305 or $69,858. How much do you have to take out of your 401K each year to live the retirement lifestyle that you were dreaming about? Will that taxable withdraw put you into your personal tax hump? Did you prepare for that?
I think the comment that was told to me at one of those “free dinners” described it best. “If you die while waiting to start your benefits, you had enough money to last the rest of your life! If you start as soon as you can, you might run out of money before you die!”
Now that we have a reasonable estimate of your Personal Social Security benefit level, let's examine where your retirement money might come from so that you can start planning how to achieve these goals.