Q & A
Ask Rusty – Estimated vs Actual Benefits
Dear Rusty: I am going to stop working in October 2018 at age 62. I do not want to start drawing my Social Security then (at age 62 it would be $1,005/month; normal retirement is 66 years, 4 months, $1,454/month). I do not plan on taking another job. I plan to start taking my benefits at my normal retirement date. Will my benefits at normal retirement be reduced for each year I don’t work or will they remain at the current amount? Is there a certain percentage they reduce them or a formula they use? Signed: Planning For Retirement
Dear Planning: Okay, so let’s first tackle the question of your estimated retirement benefits at age 62 and also at age 66 + 4 months which is your “normal” or full retirement age (FRA). These benefit estimates, which you have gotten from your My Social Security account at the Social Security website, assume your current earnings level will continue until you reach your full retirement age. If you instead stop working at age 62, your actual benefit when you finally start collecting could be less than the estimates they gave you. This is because your benefits are based upon the highest earning years in your work history. If some of the years used to compute your estimates are the assumed earnings between now and when you reach FRA and if you instead have no earnings in those years, your actual benefit will be less than the estimate.
There is no simple percentage of reduction used when you have no earnings between age 62 and your FRA; rather, the standard 35 year benefit calculation formula is used. That formula takes your highest earning 35 years to arrive at your Average Indexed Monthly Earnings and then computes your benefit amount from that average. Since most people have their highest earnings in the latter years of their working career, continuing to work up to the point of collecting Social Security is often a good strategy because those higher earning years will be included in the benefit computation. (It’s possible, but not usual, to have all of your highest earning 35 years earlier in your career, in which case stopping work at age 62 would not affect your FRA benefit).
So in your specific case, since you wish to stop working at age 62 and delay Social Security until you have reached your full retirement age of 66 + 4 months, I suggest you first get your earnings statement from your Social Security account and review your earnings history (remember that your prior earnings will be adjusted for inflation before computing your benefit). From your earnings statement, determine if your 35 highest earning years will have already been attained by the time you are 62. If they have, your benefit when you apply at FRA should be close to the estimate; if they have not, and you stop working, your benefit at FRA will be a little less than the estimate. Keep in mind that your actual benefit amount will not be final until you actually apply. Note too that Social Security will start adding COLA to your estimated benefit amount once you reach 62 years of age even though you are not yet collecting, which means you’ll get those COLA increases when you finally apply for benefits at FRA.