Baby Boomer’s Summary of Social Security Insights
Assuming a normal mortality many social security (SS) recipients may receive over their lifetime the equivalent of almost $500,000 in monthly annuity payments. For this type of guaranteed payment program you’d think everyone would be intimately informed about the program. Well you’d be wrong. Far too few recipients know much about about how social security (SS) functions and how to get the most out of the program. So let’s begin to review some of the key factors within the social security system.
The exact amount of SS benefit is not computed until you turn 62. At that time, all of your annual earnings are indexed to account for wage inflation. Your highest 35 years of earnings are tallied to start the calculcation. If you worked less than 35 years the missing years will be filled in with zeros. Each of the 35 years of earnings are totaled and divided by 35 to arrive at your average indexed monthly earnings, or AIME.
Let’s say your earnings are averaged and your AIME comes out to be $7260. A three(3) part formula is applied to the AIME toarrive at your primary insurance amount, or PIA.
Here’s hoe the formula would apply to this $7,260 AIME amount. The first $711 of the AIME is multiplied by 90%. The amount between $711 and $4288 ($3577) is multiplied by 32%. The amount over $4288 (7260-4288=2972) is multiplied by 15%. In summary here’s what we have:
$711 x .90 = $639.90
$3577 x .32 = $1144.64
$2972 x .15 = $445.80
Total $2230.34
Our PIA is $2,230.34. This is the amount you would have receive monthly if you apply for your benefit at age 66, your full retirement age.
You can apply for SS starting at age 62 thru any month before reaching age 70. You monthly benefit will be reduced by about 25% if you apply at age 62. Full payment is generally age 66 or 67. You can receive additional credit if you wait until age 70 to take your benefit. There is no benefit for waiting after age70. The increased benfeit is 8% every year you wait after your full retirement age. In my example, if the recipient waited until age 70 to receive benefits his $2230 PIA would be increased by 132% to $2943 (not including annual COLAs). These credits are calculated on a monthly basis. So you can apply at anytime between your 66th and 70th birthday and receive a prorated credit for the delay.
When should you apply for social security? If you apply now, (62), you’ll receive more checks, but smaller monthly amounts. If you apply later , (66-70), you’ll receive fewer checks but higher montlhy amounts. The future COLA (cost of living increase) increases are based on the initial amount of your first monthly PIA. So if you start at age 62 with reduced monthly benefits you will in essence have given up future COLA increases based on your full retirement benefit. This adds up over the years to a sizeable difference. The crossover point is your “breakeven” age. Once you know your breakeven age, all you have to do is look into a crystal ball to see if you’ll live that long. Breakeven calculators can be found at www.socialsecurity.gov, click on retirement planner and then click on topical item.
Next article I’ll outline spousal benefits, government positions, divorce, widowhood, and working while on benefits before age 65, and how benefits are taxed.
The discussion of Social Security benefits is one of those critical subjects to be discussed between spouses so that the financial merits are fully known by both.
For more information please visit: http://www.hargrave-lyons.com
Stanley Hargrave is a partner at Hargrave & Associates,LLC, a wealth management firm located in Riverside,CA. He is a certified financial planner (CFP) and an adjunct faculty member with the University of California, Riverside. He holds a masters degree in financial planning-wealth management and has over 30 years of experience in his field.
Article Source:http://www.articlesbase.com/personal-finance-articles/baby-boomers-summary-of-social-security-insights-1164172.html
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