The fundamentals of social security decision-making

Let’s talk about the fundamentals of your social security decision-making, how the government calculates the numbers on your behalf, and how this data can affect your decision on when to take social security.

Nobody’s ever accused the government of having wonderful technology and great websites. But as far as social security goes, their website actually isn’t too bad. There’s one part on that website that I usually will disagree with, as right on their homepage it says that in as little as 15 minutes time you can plan out when you should collect social security.

I’ve got a problem with that.

You’ve spent the last 25, 35, 45 years of your life putting money into social security, and it’s going to play a huge role in how long your money lasts. I think it deserves more than 15 minutes of your time.

Before we dig into the fundamentals of social security decision-making there are a few definitions that I want you to know.

Full Retirement Age (F.R.A.)

F.R.A. is one of those government acronyms that gets thrown around yet no one really has any idea what it means. F.R.A. is the age at which you should start collecting social security, according to government calculations. (It’s going to range between ages 66 and 67)

If you look at your social security statement on page 2, they will tell you what your full retirement age is.

It’s going to say age 66 in 1 month, it might say age 66 in 7 months, or it might say age 67. Your full retirement age is the age at which they calculate your social security benefit.

There’s another thing you have to be aware of, and that is how they calculate your social security benefit.

They do something called Average Index Monthly Earnings, which is on page 3 of your social security statement. You’ll see all these numbers and it’s going to start with the very first year you worked. You’ll see how much you earned that year in social security.

And they actually take an index. They take an inflation factor to it, if you will, and they adjust it for inflation. And they show you every single year.

You might have some zeros in there. You might have some really big years. Maybe it just increases normally for you. Example: as you got older you made more money.

You’re also going to have different amounts of years. Some people may have 10 years, some may have 40 years. But you’re going to have all of your years listed out.

Average Index Monthly Earning calculation

Step 1: Taking your 35 highest working years

And how they calculate the average index monthly earnings is they take those 35 highest years. If you worked for 45 years, they’ll take the 35 highest. If you worked for 20 years, they’re going to take all 20 years and they’re gonna give you 15 zeros.

They’ll then add them all up and divide by 420.

Why 420? Because there are 420 months in 35 years. They’re trying to come up with a monthly average of those numbers. So they take the highest 35 years, divide it by 420, and you’ll have the average monthly earnings over your working years.

Step 2: Determining the percentages

Step two is they take that monthly average number and they dump it into a secondary calculation. The first roughly $900 to $1,500 gets a really high variable placed to it. That variable could be about 90%, 85 or 90%.

Anything above that $900 or so, up until about around $2,800, it gets a much lower number of about 40%.

Anything above that only gets about 18% of the money attached to it. They take those numbers, add them up, and that becomes your Average Index Monthly Earnings.

And that’s what they use to calculate what your full retirement age amount is going to be. That’s what they use to calculate your F.R.A. amount. Now on page 2, they also give you 2 additional numbers.

  1. They give you your age 62 amount, which is the earliest you can start collecting.
  2. And they give you your age 70 amount, which is the latest you can start collecting.

And those numbers are just simply different variables based off of that full retirement age. For the age 70 amount, they take your full retirement age amount and they add 8% a year. And if you are starting younger, they actually reduce it by about 7% a year. It’s not exact, but it’s about 7% a year. So if you start early, you’re going to get a smaller amount.

And if you start later, all the way out to age 70, you’re going to get a greatly increased amount. So when should you start? That will be our next video, and I hope you join us for it then.

I hope you got some value out of the video we just shared with you. And if you know somebody else that could find value in this, please feel free to share it with them. If you yourself would like to talk further about this, please use the link below to book a 15 minute phone call with our office. Thanks.