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.