Reduced Benefit Calculations
This calculator can be used to estimate the reduction in Social Security benefits of both the primary and spouse beneficiary that occur when receiving benefits before the normal retirement age. The calculator needs a total of five inputs, including:
- The birthdate of both the primary and spouse (if any) beneficiaries
- The Social Security benefits commencement date for both the primary and spouse (if any) beneficiaries
- The fully monthly Social Security benefit
The calculator then provides the user with seven outputs:
- The normal retirement age of the primary beneficiary. When this age is reached, the person is eligible for 100% of their Social Security retirement benefits
- Based on each of the beneficiary’s ages, the calculator determines their percentage reduction in benefits
- Next, the calculator will apply the reduction in benefits to the full monthly benefit to reveal the age-adjusted monthly benefit of both the primary and spouse beneficiary
- Using the total monthly benefit, the calculator will also show the total annual Social Security retirement benefit
Note: This calculator only reveals the penalty that occurs when applying for Social Security before your normal retirement age. If you delay receiving benefits until after your birthdate, you can receive more than 100% of your monthly Social Security benefit.
What is a Normal Retirement Age?
Historically, qualified persons would receive full Social Security retirement benefits at age 65. That changed back in 1983 with several amendments to the Social Security Act and full retirement age, or FRA, was increased to age 67 for people born in 1960 or later. Our calculator can determine normal retirement for anyone born after 1943. While it is common for people to refer to this retirement benefit as Social Security, the actual name of the program is Old-Age, Survivors and Disability Insurance (OASDI) and the funding for this program is collected via payroll taxes as FICA, or the Federal Insurance Contribution Act. The important fact to remember is this calculator can provide normal retirement which is the age at which full benefits are provided.
Receiving Social Security Retirement Benefits
Eligible persons can receive Social Security benefits starting at age 62. Since this is prior to full retirement age there is a penalty. Waiting until full retirement age means 100% of benefits are provided. It’s also possible to receive more than 100% of the calculated benefits by delaying Social Security. The system is meant to be fair to participants. Receiving benefits before full retirement age means receiving more monthly checks and that’s one of the reasons benefits are reduced. The same holds true for delaying benefits. Since fewer monthly payments will be made, those payments will be higher.
Does Delaying Social Security Make Sense?
This calculator can help you figure out if delaying Social Security makes sense in your situation. We can use the default calculator data in this example.
Default Data
- Primary Birthdate – 7/1/1958
- Benefits Commencement – 7/1/2022
- Spouse Birthdate – 7/1/1959
- Benefits Commencement – 7/1/2021
- Total Monthly Benefit – 1,146
Default Data + 1 Year (12 months)
- Primary Birthdate – 7/1/1958
- Benefits Commencement – 7/1/2023
- Spouse Birthdate – 7/1/1959
- Benefits Commencement – 7/1/2022
- Total Monthly Benefits – 1,237
In the above example, both the primary and spouse beneficiary delayed benefits by twelve months. By doing so, they gave up 12 monthly payments at 1,146, or a total of 13,750. The difference between the two monthly payments is 1,237 – 1,146, or ninety-one per month. By dividing the 13,750 by ninety-one, we know it will take around 151 months before we break even. After 151 months, or roughly 12 years and seven months, the beneficiaries would have been better off delaying Social Security. For our primary beneficiary, this would be at age 77. So, the decision to delay comes down to only a couple of factors. The key factor has to do with the beneficiary’s health. In this case, does the person believe they will live well beyond the breakeven age of 77?
If we look at the possibility of investing that 13,750 at 6%, then the timeline becomes even longer – something closer to 23 years to reach breakeven. In this case, does the person believe they will live well beyond the age of 88? These two examples demonstrate the fairness of the Social Security system and the myth around penalties for receiving benefits early. This is also the reason it’s possible to receive more than 100% of these benefits by delaying past the normal retirement age.