A new study has revealed a much brighter and less dark future than previously thought for most adults approaching retirement. Many of them underestimate the scope and impact their benefits can have when they reach old age. Neglecting financial planning for old age can have serious consequences, especially for those who are going to rely heavily on these benefits to support their living expenses.
In fact, many adults who save for retirement believe that they will have less money than they really, statistically, would touch. The National Bureau of Economic Statistics conducted a study and showed a trend among older adults, especially those between the ages of 51 and 65:
- 50% of adults underestimate their annual Social Security income by more than $1,116.
- 25% underestimate this income by more than $5,167.
- 10% do it at more than $10,659.
This underestimation may come as a positive surprise if the actual benefits are higher, but it is essential that future retirees have a clear understanding of their projected income in order to properly plan for their retirement.
Learning How to Estimate Your Retirement Benefits
Every person on the way to retirement should know how much he is saving, how much he has, how much he saves per year and how much more or less he will have when he reaches his full retirement age (FRA). All these data are relevant to deciding exactly at what age you should retire. If you retire too early, you may face financial difficulties because claiming Social Security benefits at too young an age brings cuts in lifetime checks. However, delaying it until a later age, for example, the age of 70, brings substantial increases in monthly payments.
Currently, the Social Security Law allows retirees to retire from the age of 62. The credits stop accumulating at the age of 70, so it makes no sense to delay the claim beyond this age.
How Social Security Benefits are Calculated
The calculation of Social Security benefits is based on several factors, including work history and lifetime earnings. The key steps in this process are:
- Income Indexation: Lifetime earnings are adjusted based on the national average wage level to reflect changes in living standards over the worker’s career.
Indexed Monthly Average Earnings (AIME): The adjusted earnings of the highest-paid 35-year-olds are converted to a monthly average. - Primary Insurance Amount (PIA): A formula is applied to the AIME to determine the PIA, which is the benefit that would be received if Social Security is claimed at full retirement age (FRA).
- Adjustments for Early or Delayed Retirement: The PIA is adjusted according to the age at which the benefits are claimed. Applying before the FRA results in a smaller benefit, while doing so later increases the amount.
Social Security Benefits: Impact of Year of Birth on Retirement
The recent analysis on Social Security benefits reveals how the date of birth significantly affects the amount retirees can receive, whether they choose to claim at age 62 or wait until age 70. The following study shows the relationship between the year of birth and the full retirement age (FRA), highlighting the benefit as a percentage of the Average Annual Income (PIA).
Birth Years and Full Retirement Ages
For people born between 1943 and 1954, the full retirement age is set at 66 years. This group can claim a benefit of 75% of the PIA if they retire at age 62, while waiting until age 70 increases the benefit to 132%.
Those born in 1955 face a slight increase in the full retirement age, standing at 66 years and 2 months. In this case, the benefits at age 62 are equivalent to 74.2% of the PIA, increasing to 130.6% if you wait until age 70.
People born in 1956 have a full retirement age of 66 years and 4 months. If they choose to retire at age 62, they will receive 73.3% of their PIA, while by waiting until age 70, the percentage rises to 129.3%.
Gradual Increases in Retirement Age
For those born in 1957, the full retirement age is 66 years and 6 months, with a 72.5% benefit at age 62, which can increase up to 128% if retirement is postponed until age 70.
Those born in 1958 will have a full retirement age of 66 years and 8 months. Their benefit at the age of 62 is 71.7%, increasing to 126.6% at the age of 70.
Reduced and Increased Benefits
People born in 1959 have a full retirement age of 66 years and 10 months. If they decide to retire at age 62, the benefit is 70.8% of the PIA, increasing to 125.3% if they wait until age 70.
Finally, those born in 1960 and later will have a full retirement age of 67. If they choose to retire at age 62, they will receive 70% of the PIA, which increases to 124% if they delay retirement until age 70.