Hello, and welcome back to Powering Your Retirement Radio! Today we will talk about how your Primary Insurance Amount is calculated. I will try not to bore you, but there are many factors you need to understand. In addition, I will include several links to the Social Security website if you want to do a deeper dive.
Your Primary Insurance Amount is the basis for your Social Security whether you collect early, on time, or defer your payments. Roughly 54 million Americans receive monthly Social Security retirement benefits. That includes retirees, dependents, and survivors of deceased workers. The average check is $1,503 monthly or just over $18,000 a year. So, how does Social Security figure out what your payment will be?
The basic formula is in the whole Social Security language, and then we will break it down. First, you receive your PIA (Primary Insurance Amount) at your FRA (Full Retirement Age), based on your Earnings Record.
Seems quite simple, but what if you don’t collect your Social Security at your FRA? This is where the fun begins. I will tell you most people claim Social Security when they want it rather than when they need it or should take it. I mean, it is an emotional decision, not a financial one.
How do they calculate PIA (Primary Insurance Amount)? I wish I could say it is simple, and it is. They take your highest 35 years of earnings adjusted for inflation until you reach age 62. After 62, those years can be used, but they are not adjusted for inflation.
Your PIA Primary Insurance Amount is the starting point. The next thing to determine is when you will collect your Social Security. If you want to claim your benefits early, you can use the calculator on the Social Security website to determine the reduction. For instance, if you were born in 1960 or later, your full retirement age is 67, but you can claim as early as 62. If you were born in 1960, you could start collecting as early as 2022. You will only receive 70% of your PIA Primary Insurance Amount. If you do At 63 and 64, your reduction is 5% less each year, so 75% and 80%, respectively, and at 65 and 66, the removal is slightly more at 6.7%. So 86.7% and 93.3%
The calculation is much more straightforward if you wait until after your FRA. It is 2/3rds of 1% every month you wait until age 70. It is an 8% yearly increase or 24% over the three years. So if your PIA Primary Insurance Amount were $1,000 at FRA, at 62, you would receive $700, and at 70, you would receive $1,240 or 77% more than it would be when collecting at age 62.
That is not an insignificant difference.
That is how to calculate your Primary Insurance Amount, and several links are above. If you’d like, you can set up a time to review your Social Security record with me at www.TalkwithDL.com; mention this Episode in the meeting request. Until next time stay safe.