Full retirement age for Social Security is 66 to 67, depending on the year you were born, but you can choose to claim a reduced benefit as early as 62. The most popular age to claim Social Security retirement benefits in the United States is, you guessed it, 62. If you're planning on, or are considering, claiming your own benefit as early as possible, here's how to figure out how much you could get.
The maximum Social Security benefit at 62
The short answer is that the maximum Social Security benefit someone could get at age 62, when retiring in 2016, is $2,102. However, for this to happen, some specific criteria need to be met. Specifically, this person must have worked for 35 or more years and earned more than the taxable maximum Social Security wages in every one of those 35 years. For reference, the taxable maximum in 2016 is $118,500.
The person claiming also must have been born in 1954 or earlier (people turning 62 in 2016). Beginning with people born in 1955, the full retirement age is gradually increasing to 67 from 66, which it is now. An increase in the full retirement age means an additional reduction for retirees who claim at 62.
Watch out for these retirement gotchas
Watch out for these retirement gotchas
Failing to Contribute in Time for Taxes
Yes, there can be a right time to contribute to your retirement account. After all, you do want to cash in on the tax benefits of your 401k, right? Moreover, you don’t want to be responsible for making a lump sum contribution to your retirement account, lest you go over budget or sink your emergency funds because you forgot to make regular contributions throughout the year.
Rather than wait until tax season to contribute to retirement savings, opt instead for automated payments. Adjust your contributions so you’re reaching the maximum contribution limit each year — and don’t forget, you can make catch-up contributions if you’re over the age of 50.
Scheduled payments to your retirement account alleviates any worries you might have over not meeting savings goals for the year. Plus, it takes the legwork out of actually saving.
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A stack of retirement account statements. Shot with shallow depth of field.
Paying High Advisor Fees
Like mutual funds that can carry surprisingly high expense ratios, some financial advisors charge high fees, and they don’t always make those fees easy to understand or identify. Sometimes it’s a percentage fee, and sometimes it’s in basis points, which imagines each percent as 100 basis points or a fraction of a percent.
In any form, financial advisor fees can add up to hundreds of dollars per year. Additionally, the financial advisor could be reinvesting the money into other actively-managed funds with their own hidden fees, which can further eat away at returns.
Research your options when it comes to finding a financial advisor. You can opt for a lower-cost online advisor, which can cut those fees to 0.25 percent, for example, or find financial advisors who charge by the hour, which can be an expense that’s easier to track.
An annuity is a form of an insurance contract built into a 401k that invests the account holder’s money and, in return, pays out a steady income either in the future or right away. Retirement annuities offer tax advantages that appeal to many people. These investments can grow tax-deferred savings.
Unlike a 401k or IRA, annuities have no contribution limits, making them a useful tool for people close to retirement age and needing to catch up.
When it comes to setting up an annuity contract, however, people should be aware of the potential fees. Annuities can come with surrender charges, management fees and mortality and expense charges. You’ll want to review these fees closely to see whether an annuity works with your retirement strategy — or if you’re better off sticking to more traditional savings plans.
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Falling Into the Reverse Mortgage Trap
Not everyone can pay off a mortgage by retirement, and if you can’t, you need to consider the cost of your mortgage payment plus property taxes, homeowners insurance and all those random repair costs when things go wrong. Facing these and other financial concerns, some retirees who consider themselves cash poor but “house rich” turn to reverse mortgages.
But reverse mortgages are only suitable for people in specific circumstances and should be used carefully and strategically. You’ll want to consult a mortgage or financial advisor before proceeding with a reverse mortgage.
One of the biggest risks behind a reverse mortgage is the risk of losing your home. If you need to move out, your loan could become due. And, of course, you’ll need to fork over a lot of money for fees, which only eat more of the money you’re taking out against your home equity.
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Getting Suckered Into a Timeshare Scam
Whether your retirement plan includes downsizing to a tiny home or moving to a senior community, you need to watch out for housing pitfalls like high homeowners association fees and timeshare traps that target retirees. Any home purchase should be thoroughly researched, but people planning out their retirements on fixed incomes need to be particularly cautious of 55-and-over communities and timeshare opportunities that sound too good to be true.
Timeshare companies use high-pressure sales tactics to convince people to buy properties that typically come with annual maintenance fees and blackout dates on when owners can visit.
A common scam in recent years that targeted senior citizens in particular is when a person posing as a reseller calls the timeshare owner saying he has a buyer or poses as the buyer and then asks the owner for an amount of money up front to process the sale, according to a report from the California Department of Real Estate. The owners never see the money or hear from the scammer again. In legitimate sales, commissions are paid at the time of the sale, not up front.
The tens of thousands of dollars that people invest in timeshares they are only allowed to visit a few weeks out of the year could pay for numerous vacations across the U.S. and abroad. Don’t get trapped into a so-called dream vacation property that could become a nightmare.
The vast majority of American workers won't qualify for the maximum benefit, so a better question to ask is "How much could I get at 62?"
Let's start with your projected Social Security benefit at full retirement age, also known as your primary insurance amount, or PIA. This amount is determined by taking your 35 highest-earning years, indexed for inflation, and computing your monthly average earnings. This monthly average is then applied to a formula. As of 2016, the formula is:
90% of the first $856
32% of the amount greater than $856 but less than or equal to $5,157
15% of the amount greater than $5,157
If you know how much your earnings were throughout your career (you can find this on your tax returns), the Social Security Administration (SSA) has a worksheet you can use to estimate your PIA. Or better yet, you can find this information on your annual Social Security statement.
This amount is then adjusted based on the age at which the individual claims their benefits. For people born in 1954 or earlier, full retirement age is 66 years old. Two months are added to full retirement age for each year the individual was born after 1954, until 1960. American workers born in 1960 or later have a full retirement age of 67.
For claiming Social Security before full retirement age, benefits are reduced by the following percentages:
6-2/3% per year for the first three years, or 5/9% per month, up to 36 months early
5% per year beyond three years, or 5/12% per month beyond 36 months early, as early as age 62.
Let's say that you were born in 1956 and estimate a PIA of $1,500 per month, and want to know how much to expect if you claim at age 62.
A 1956 birth year translates to a full retirement age of 66 years, 4 months. So, claiming benefits at age 62 would be four years and four months before full retirement age. For the first three years, the benefit would be reduced by 6-2/3% per year, or 20% altogether. It would be reduced another 5% for the fourth year, plus an additional 5/12% for each of the remaining four months. In all, the PIA would be reduced by 26-2/3% for claiming at age 62. With a PIA of $1,500, this means that this individual could expect a $1,100 monthly Social Security benefit at age 62.
A good estimate
If you're still a few years or more away from retiring, there's no way of knowing with 100% accuracy what your Social Security benefits will eventually be. Your salary could change, the taxable Social Security wage base could change, or the formula to calculate benefits could potentially change between now and when you're ready to file.
Having said that, you can get a good estimate by creating an account at www.ssa.gov and viewing your most recent Social Security statement. Not only will you get an estimate of your Social Security benefit at 62, full retirement age, and age 70, but you'll also get other valuable information about disability and survivor benefits as well.
Top 10 states for retirement
Top 10 states for retirement
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5. South Dakota
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The $15,834 Social Security bonus most retirees completely overlook
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