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What you need to know about Social Security

Trying to figure out when to collect Social Security? Let's start with the basics.

POINTS TO KNOW

  • Social Security retirement benefits are a safety net for retirees.
  • Payroll taxes on employees and employers fund the Social Security program.
  • Your Social Security benefits should be considered an important part of your retirement income.

Social Security 101

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What's Social Security?

Social Security is a federal government program that provides a guaranteed monthly income adjusted for inflation for as long as you live.

Basically, it's similar to an income annuity, an insurance product that provides regular guaranteed payments. But it isn't intended to be your total retirement package.

Source: Social Security Administration.


Who pays for Social Security?

Social Security isn't like other retirement accounts—such as IRAs and 401(k)s—that enable you to invest with an opportunity for growth and then draw from your savings in retirement.

It's basically a pay-as-you-go system. While you're working, you contribute to Social Security through payroll deductions, currently 6.2%. Your employer also contributes 6.2%.

Your deductions fund the benefits for current recipients; in turn, when you claim benefits, the people who are working at that time will fund your payout with their payroll taxes.

How do you qualify for Social Security?

There are 4 ways you can qualify for Social Security: by accumulating a minimum number of credits based on your earnings history; as a spouse; as a surviving spouse or surviving ex-spouse; or as an ex-spouse.


Your earnings history

Think of Social Security credits as the building blocks of your benefits. You need a minimum of 40 credits to be eligible—typically accumulated over 10 years of working.

Based on your total wages and self-employment income, you can earn a maximum of 4 credits per year.

In 2019, you need $1,360 in earnings to get one Social Security credit ($5,440 for the maximum 4 credits).

Your work credits permanently stay on your record, so if you don't have the required 40 credits yet, you can add to your record at any time by working more.


As a spouse

You're eligible for Social Security based on your own earnings record or even if you've never held a job that qualifies for Social Security.

  • You must be at least 62 years old.
  • If you claim Social Security before your full retirement age (FRA), you'll receive reduced benefits.
  • If you worked for a job that qualifies for Social Security, it's advantageous to coordinate your benefits with your spouse's.
  • If you never worked for a job that qualifies for Social Security, your benefits at FRA are equal to 50% of your spouse's benefits, regardless of whether your spouse is collecting his or her benefits.


As a surviving spouse

If your spouse worked and paid Social Security taxes, you may be eligible for benefits when your spouse dies.

  • Your spouse must have worked a minimum number of years (up to 10 years, depending on your spouse's age at the time of death).
  • You can receive full benefits at your full retirement age (FRA) or reduced benefits as early as age 60.
  • You may qualify for benefits based on other family situations, such as taking care of minor children.


As an ex-spouse

If you're divorced, you may be able to receive benefits based on your ex-spouse's record if:

  • You were married for at least 10 years.
  • You aren't currently married.
  • Your ex-spouse is at least 62 years old and qualifies for Social Security. Note: If your ex-spouse hasn't filed for benefits, you can receive benefits on your ex-spouse's record if you've been divorced for at least 2 years.

What determines your benefits?

The Social Security Administration (SSA) uses a combination of factors to calculate your benefits, officially known as the primary insurance amount (PIA).

Birth date. Your birth date determines your full retirement age (FRA), which is when you're eligible to receive 100% of your Social Security benefits.

Find your FRA

Lifetime earnings. Social Security uses your 35 years of highest earnings to come up with your benefit amount. If you worked fewer than 35 years, those years will count as zeros in the calculation. In addition, past earnings are indexed to account for wage growth.

Start date. Your benefits depend on when you start collecting, which can be anytime between ages 62 and 70.

Percentage of Social Security benefits you'll receive by age

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Birth year: 1943–1954


AGE YOU START COLLECTING

62 (earliest possible)

PERCENTAGE OF BENEFITS

75.0%


AGE YOU START COLLECTING

63

PERCENTAGE OF BENEFITS

80.0%


AGE YOU START COLLECTING

64

PERCENTAGE OF BENEFITS

86.7%


AGE YOU START COLLECTING

65

PERCENTAGE OF BENEFITS

93.3%


AGE YOU START COLLECTING

66 (full retirement age)

PERCENTAGE OF BENEFITS

100.0%


AGE YOU START COLLECTING

67

PERCENTAGE OF BENEFITS

108.0%


AGE YOU START COLLECTING

68

PERCENTAGE OF BENEFITS

116.0%


AGE YOU START COLLECTING

69

PERCENTAGE OF BENEFITS

124.0%


AGE YOU START COLLECTING

70 (latest possible)

PERCENTAGE OF BENEFITS

132.0%

Birth year: 1955


AGE YOU START COLLECTING

62 (earliest possible)

PERCENTAGE OF BENEFITS

74.2%


AGE YOU START COLLECTING

63

PERCENTAGE OF BENEFITS

79.2%


AGE YOU START COLLECTING

64

PERCENTAGE OF BENEFITS

85.6%


AGE YOU START COLLECTING

65

PERCENTAGE OF BENEFITS

92.2%


AGE YOU START COLLECTING

66

PERCENTAGE OF BENEFITS

98.9%


AGE YOU START COLLECTING

66 and 2 months (full retirement age)

PERCENTAGE OF BENEFITS

100.0%


AGE YOU START COLLECTING

67

PERCENTAGE OF BENEFITS

106.7%


AGE YOU START COLLECTING

68

PERCENTAGE OF BENEFITS

114.7%


AGE YOU START COLLECTING

69

PERCENTAGE OF BENEFITS

122.7%


AGE YOU START COLLECTING

70 (latest possible)

PERCENTAGE OF BENEFITS

130.7%

Birth year: 1956


AGE YOU START COLLECTING

62 (earliest possible)

PERCENTAGE OF BENEFITS

73.3%


AGE YOU START COLLECTING

63

PERCENTAGE OF BENEFITS

78.3%


AGE YOU START COLLECTING

64

PERCENTAGE OF BENEFITS

84.4%


AGE YOU START COLLECTING

65

PERCENTAGE OF BENEFITS

91.1%


AGE YOU START COLLECTING

66

PERCENTAGE OF BENEFITS

97.8%


AGE YOU START COLLECTING

66 and 4 months (full retirement age)

PERCENTAGE OF BENEFITS

100.0%


AGE YOU START COLLECTING

67

PERCENTAGE OF BENEFITS

105.3%


AGE YOU START COLLECTING

68

PERCENTAGE OF BENEFITS

113.3%


AGE YOU START COLLECTING

69

PERCENTAGE OF BENEFITS

121.3%


AGE YOU START COLLECTING

70 (latest possible)

PERCENTAGE OF BENEFITS

129.3%

Birth year: 1957


AGE YOU START COLLECTING

62 (earliest possible)

PERCENTAGE OF BENEFITS

72.5%


AGE YOU START COLLECTING

63

PERCENTAGE OF BENEFITS

77.5%


AGE YOU START COLLECTING

64

PERCENTAGE OF BENEFITS

83.3%


AGE YOU START COLLECTING

65

PERCENTAGE OF BENEFITS

90.0%


AGE YOU START COLLECTING

66

PERCENTAGE OF BENEFITS

96.7%


AGE YOU START COLLECTING

66 and 6 months (full retirement age)

PERCENTAGE OF BENEFITS

100.0%


AGE YOU START COLLECTING

67

PERCENTAGE OF BENEFITS

104.0%


AGE YOU START COLLECTING

68

PERCENTAGE OF BENEFITS

112.0%


AGE YOU START COLLECTING

69

PERCENTAGE OF BENEFITS

120.0%


AGE YOU START COLLECTING

70 (latest possible)

PERCENTAGE OF BENEFITS

128.0%

Birth year: 1958


AGE YOU START COLLECTING

62 (earliest possible)

PERCENTAGE OF BENEFITS

71.7%


AGE YOU START COLLECTING

63

PERCENTAGE OF BENEFITS

76.7%


AGE YOU START COLLECTING

64

PERCENTAGE OF BENEFITS

82.2%


AGE YOU START COLLECTING

65

PERCENTAGE OF BENEFITS

88.9%


AGE YOU START COLLECTING

66

PERCENTAGE OF BENEFITS

95.6%


AGE YOU START COLLECTING

66 and 8 months (full retirement age)

PERCENTAGE OF BENEFITS

100.0%


AGE YOU START COLLECTING

67

PERCENTAGE OF BENEFITS

102.7%


AGE YOU START COLLECTING

68

PERCENTAGE OF BENEFITS

110.7%


AGE YOU START COLLECTING

69

PERCENTAGE OF BENEFITS

118.7%


AGE YOU START COLLECTING

70 (latest possible)

PERCENTAGE OF BENEFITS

126.7%

Birth year: 1959


AGE YOU START COLLECTING

62 (earliest possible)

PERCENTAGE OF BENEFITS

70.8%


AGE YOU START COLLECTING

63

PERCENTAGE OF BENEFITS

75.8%


AGE YOU START COLLECTING

64

PERCENTAGE OF BENEFITS

81.1%


AGE YOU START COLLECTING

65

PERCENTAGE OF BENEFITS

87.8%


AGE YOU START COLLECTING

66

PERCENTAGE OF BENEFITS

94.4%


AGE YOU START COLLECTING

66 and 10 months (full retirement age)

PERCENTAGE OF BENEFITS

100.0%


AGE YOU START COLLECTING

67

PERCENTAGE OF BENEFITS

101.3%


AGE YOU START COLLECTING

68

PERCENTAGE OF BENEFITS

109.3%


AGE YOU START COLLECTING

69

PERCENTAGE OF BENEFITS

117.3%


AGE YOU START COLLECTING

70 (latest possible)

PERCENTAGE OF BENEFITS

125.3%

Birth year: 1960 and after


AGE YOU START COLLECTING

62 (earliest possible)

PERCENTAGE OF BENEFITS

70%


AGE YOU START COLLECTING

63

PERCENTAGE OF BENEFITS

75.0%


AGE YOU START COLLECTING

64

PERCENTAGE OF BENEFITS

80.0%


AGE YOU START COLLECTING

65

PERCENTAGE OF BENEFITS

86.7%


AGE YOU START COLLECTING

66

PERCENTAGE OF BENEFITS

93.3%


AGE YOU START COLLECTING

67 (full retirement age)

PERCENTAGE OF BENEFITS

100.0%


AGE YOU START COLLECTING

68

PERCENTAGE OF BENEFITS

108.0%


AGE YOU START COLLECTING

69

PERCENTAGE OF BENEFITS

116.0%


AGE YOU START COLLECTING

70 (latest possible)

PERCENTAGE OF BENEFITS

124.0%

Create a strategy to maximize your benefits

Social Security represents a significant source of retirement income for most Americans.

According to government statistics, the benefits replace about 40% of an average retiree's income. Yet in 2015, 62% of beneficiaries age 65 or older received at least half of their income from Social Security.

Even for affluent retirees (age 60–79 with at least $100,000 in financial assets), a Vanguard study found Social Security accounts for 29% of total retirement income, on average.*

These statistics illustrate the importance of timing—knowing when it's most advantageous to collect benefits considering your health, life expectancy, current wealth, tax profile, and employment status.

Your decision will have a lasting impact on the amount you'll receive each month and can mean a difference of thousands of dollars over your lifetime. Collect Social Security before your full retirement age (FRA) and your benefits will be permanently reduced. Wait until after your FRA and your benefits will increase every month you delay.

Should you consider a break-even analysis?

Consider the following factors

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Retirement planning

Your Social Security benefits should be a vital component of your overall retirement strategy.

Hopefully, you have a retirement plan in place. If not, we can help you get started.

  • Look at how much you've saved and how much you expect to spend in retirement.
  • Take other income sources into account, such as a pension plan, income annuity, 401(k), or IRA.
  • Ask yourself if you need the benefits as soon as you're eligible or can you wait until your full retirement age (FRA) or even later.

Marital status

Your marital status can be an important consideration in figuring out the best time to claim Social Security.

Married. It's advantageous for couples to coordinate their benefits.

Never married. Your best strategy may be to wait as long as possible to collect benefits.

Divorced. You may be able to collect benefits on your ex-spouse's record.

Surviving spouse. You may be able to collect benefits even earlier than the normal starting age.

Health history

Realistically assessing your health—and your family's health history—can help you decide whether to claim early or to wait.

Generally, the longer your life expectancy, the more it pays to put off taking Social Security benefits to get the highest possible payout.

If your parents and grandparents lived into their 80s and 90s and you're in good health, you may want to delay benefits. By waiting, you'll protect against the risk that you'll outlive your assets. Even people with average life expectancies will usually benefit from delaying Social Security.

But if you have serious medical conditions or develop an unexpected medical issue, it may be prudent to take Social Security as soon as you can or when you need it.

According to the Social Security Administration:

  • A man reaching age 65 today can expect to live, on average, until he's 84; a woman until she's 86.
  • About 1 out of 3 of today's 65-year-olds will live past age 90.
  • About 1 out of 7 of today's 65-year-olds will live past age 95.

If you decide to claim early, remember that you won't qualify for Medicare until you're 65. You'll need to account for where you'll get health insurance until then.

Risk tolerance

Social Security benefits are backed by the U.S. government, so the risks you face with retirement plans don't exist with Social Security.

  • Your monthly benefit represents steady income for as long as you live.
  • For every year you wait to collect past your full retirement age (FRA), your benefits increase by 8% (⅔ of 1% per month) until age 70, when the increase stops. That's a 32% increase if your FRA is age 66.
  • The stock markets have no effect on Social Security benefits.
  • You receive regular cost-of-living increases to keep up with inflation.
  • Your benefits may help you avoid dipping into other retirement investments to meet your basic living expenses.

Tax consequences

A big surprise for many retirees is that Social Security benefits and retirement investments are subject to taxes.

In fact, about 40% of Social Security recipients pay income taxes on their benefits.

The good news is that while a portion of your benefits may be subject to federal taxes—and possibly state taxes—it's never 100%.

Work status

A Gallup poll released in May 2017 found that 74% of Americans planned to work past retirement age. Most of them (63%) planned to work part-time.

If you're going to keep working in any capacity, you'll need to factor in those plans in deciding when to collect Social Security.

You can earn as much as you want after you reach full retirement age (FRA) without affecting your Social Security benefits.

Earnings before you reach FRA are subject to an earnings test, meaning that if the earnings exceed certain limits, some of your benefits will be temporarily withheld until you reach FRA.

What if you change your mind?

Say you claim Social Security and then change your mind. Perhaps you're still working, you take a part-time job, or you get an unexpected windfall.

If you think you no longer need the benefits, you have 2 options:

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The "reset" rule

If you start collecting reduced benefits before your full retirement age (FRA), you can "reset" your benefits and erase the reduction.

  • You must withdraw your benefits claim within 12 months of filing.
  • You must repay all benefits your family received based on your earnings record.
  • By deferring your benefits, you'll receive the increased benefit amount when you reapply for Social Security.

Pros

  • You can repay benefits interest-free.
  • There's no penalty for repayment.
  • You have flexibility if your situation changes.

Cons

  • You must repay the money in a lump sum.
  • You may only reset your benefits once.

See how it works: The "reset" rule

The voluntary suspension rule

If you started collecting reduced benefits before your full retirement age (FRA) and missed the reset deadline, you can suspend your benefits once you reach FRA and restart them later.

  • You start claiming Social Security benefits before reaching your FRA.
  • Upon reaching FRA, you decide you don't need the money and suspend your benefits.
  • You can delay resuming benefits as late as age 70.

Pros

  • Your benefits grow 8% a year between FRA and when you resume collecting. If you wait the full 4 years (for those whose FRA is 66) before you restart, you could boost your benefits by 32%.
  • The delayed benefits also include the program's annual cost-of-living adjustments for inflation, if any.
  • You have flexibility if your situation changes.

Cons

  • When you resume receiving benefits, the higher payout will be calculated based on the reduced benefit you locked in when you first claimed Social Security. (It will still be higher than if you hadn't suspended your benefits at FRA.)
  • The "stop" period will fully suspend any benefits your family may be receiving. Their benefits will resume when you restart yours.

See how it works: Voluntary suspension

A Vanguard advisor can help

If you're struggling with making your best Social Security decision, we can help. You'll also get a custom financial plan, ongoing portfolio management, investment coaching, and real-time goal tracking—all at a low cost.

What's next?

Social Security provides more than just retirement benefits. And the federal government offers more than just Social Security benefits. As you put your retirement plan together, check to see whether you qualify for other government benefits, such as family and children services, tax assistance, and active military or veterans benefits.

Apply for Social Security

You can file for Social Security benefits online, over the phone, or in person at a local Social Security Administration office.

Your Social Security guide


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REFERENCE CONTENT

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Inflation

The increase in the prices of goods and services over time. Inflation poses the risk that increases in the cost of living will reduce or eliminate the returns on a particular investment.

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Income annuity

A contract between an individual and an insurance company that provides for periodic payments to the individual or designated beneficiary in return for an investment. The payments may continue for the lifetime of the annuitant or for an agreed-upon term of years.

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Retirement account

A tax-deferred account aimed at preserving money for an individual's retirement.

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Individual retirement account (IRA)

A type of account created by the IRS that offers tax benefits when you use it to save for retirement.

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401(k) plan

A type of employer-sponsored retirement plan that allows employees to contribute pre-tax dollars by deferring salary. Many plans offer a variety of investment options, and employers often match a percentage of employee contributions.

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Medicare

The federal health insurance program for anyone age 65 and older. Certain people with disabilities may be covered before age 65.

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Full retirement age (FRA)

The age at which you're eligible for your full monthly benefits, also known as the primary insurance amount (PIA). The Social Security Administration sometimes refers to full retirement age as "normal retirement age" (NRA).

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Primary insurance amount (PIA)

Also known as the full monthly benefit amount, the Social Security benefits you'll receive if you start collecting at your full retirement age (FRA). The benefits are based on your historical earnings.

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Pension plan

An arrangement under which an employer—and sometimes the employee—makes payments toward retirement, disability, or death benefits for employees who meet certain criteria. Types of pension plans include defined benefit plans, defined contribution plans, employee stock ownership plans, money purchase plans, profit-sharing plans, stock bonus plans, thrift plans, and target benefit plans.

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Stock market

The concept of a stock market (also known as an equity market) combines 2 components: the exchanges that host the actual trading of stocks and the indexes that measure the prices of the stocks being traded.

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Cost of living

The average cost of the basic necessities for everyday living, such as food, shelter, clothing, and health care.

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Interest

The amount or rate charged when you borrow money.

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Cost of living

The average cost of the basic necessities for everyday living, such as food, shelter, clothing, and health care.

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Find your FRA


BIRTH YEAR

1943-54

FULL RETIREMENT AGE

66


BIRTH YEAR

1955

FULL RETIREMENT AGE

66 and 2 months


BIRTH YEAR

1956

FULL RETIREMENT AGE

66 and 4 months


BIRTH YEAR

1957

FULL RETIREMENT AGE

66 and 6 months


BIRTH YEAR

1958

FULL RETIREMENT AGE

66 and 8 months


BIRTH YEAR

1959

FULL RETIREMENT AGE

66 and 10 months


BIRTH YEAR

1960+

FULL RETIREMENT AGE

67

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Voluntary suspension

Cheryl, age 61, is starting to look at her Social Security options.

  • If she claims early, at age 62, her benefits would be reduced by 25% to $750 a month.
  • If she claims her benefits at her full retirement age (FRA) of 66, she'll be due $1,000 a month.
  • If she waits until age 70 to claim, that number would rise 32% to $1,320 a month (in real, inflation-adjusted terms).

Now, if Cheryl claims early (the "start"), she can voluntarily suspend her benefits at age 66 (the "stop").

Then when she resumes her benefits at age 70 (the second "start"), that $750 she had been receiving before she suspended her benefits would rise by 32% to $990 a month. That payment is significantly higher than $750 but is far lower than the $1,320 she'd receive if she waited until age 70 to claim benefits initially.*


footnote*Sources: Vanguard calculations, based on data from Society of Actuaries, 2014, RP-2014 Mortality Tables Report (Schaumberg, Ill.: Society of Actuaries), and Society of Actuaries, 2014, Mortality Improvement Scale MP-2014 Report (Schaumberg, Ill.: Society of Actuaries).

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The "reset" rule

Deborah started to receive Social Security benefits at age 64. Nearly a year later, she's working again and she wishes she'd waited until her full retirement age (FRA) so that she could have received higher benefits. Deborah can pay back all the payments she received, without interest, and file paperwork with the Social Security Administration to stop her benefits and withdraw her application.

By doing that, she "resets" her Social Security benefits so that when she starts to collect again, she'll receive a higher benefit amount based on her age. Deborah needs to consider the source of the funds she's required to return to Social Security. Using taxable assets or taking a distribution from a retirement account may be the most tax-efficient means of raising funds for the payback.

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The percentage of your full Social Security benefits that you'll receive by age

1943–54: FRA 66


AGE YOU START COLLECTING BENEFITS

62

PERCENTAGE OF BENEFITS YOU'LL RECEIVE

75%


AGE YOU START COLLECTING BENEFITS

66

PERCENTAGE OF BENEFITS YOU'LL RECEIVE

100%


AGE YOU START COLLECTING BENEFITS

67

PERCENTAGE OF BENEFITS YOU'LL RECEIVE

108%


AGE YOU START COLLECTING BENEFITS

70

PERCENTAGE OF BENEFITS YOU'LL RECEIVE

132%

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Should you consider a break-even analysis?

The question many people wrestle with in trying to decide when to take Social Security is: When will I come out ahead?

The decision as to the "right" time to claim Social Security has often been based on a break-even analysis of a retiree's expected benefits, if claimed at different ages, versus his or her life expectancy. The break-even point is the age at which the benefit amounts intersect.

In other words, will the money you'll get by claiming early and getting smaller checks for potentially a longer period of time be more than what you'll get by waiting and getting larger checks for potentially a shorter period of time?

Case study

John is 61 and his full retirement age (FRA) is 66 and 6 months. He gets the following monthly estimates of his benefits by logging on to his account on ssa.gov:

  • At age 62: $1,812.50.
  • At age 66½: $2,500.
  • At age 70: $3,200.

Here are his break-even points for claiming at various ages.

  • Between ages 76 and 77 if John claims at age 62 versus FRA.
  • Between ages 80 and 81 if John claims at age 62 versus age 70.
  • Between ages 84 and 85 if John claims at FRA versus age 70.

Source: Vanguard calculation. Notes: Figure shows the cumulative net present value of expected benefits at various claiming ages using a 1% discount rate. Amounts are presented in real terms and don't include estimates of cost-of-living adjustments.

The limitations of break-even analysis

Simply looking at a lifetime lump sum ignores 2 key features of Social Security:

  • Once you start receiving it, it's paid for the rest of your life, no matter how long you live.
  • It's adjusted upward for inflation.

A big concern for most retirees is the risk of outliving their savings. In the case of our hypothetical 61-year-old, Social Security life expectancy tables show his median life expectancy is about equal to the break-even age if he claims Social Security at FRA versus 70.

So if you can afford to do so, deferring Social Security for a few years (even past your FRA to the maximum benefit at age 70) increases your lifetime monthly benefit. And that can help you bridge any income gap you may have in meeting your expenses.

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Full retirement age (FRA)

The age at which you're eligible for your full monthly benefits, also known as the primary insurance amount (PIA). The Social Security Administration sometimes refers to full retirement age as "normal retirement age" (NRA).

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Full retirement age (FRA)

The age at which you're eligible for your full monthly benefits, also known as the primary insurance amount (PIA). The Social Security Administration sometimes refers to full retirement age as "normal retirement age" (NRA).