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Social Security - the Basics

Social Security is a government guaranteed, inflation adjusted, lifetime annuity. This means it is an insurance product where we make premium payments when we work and late in life (mostly) receive benefits. It is not a savings account process where we each have an account with our contributions held and invested for us.

Each of us has a Full Retirement Age (FRA), which is the age our basic benefit, called the Primary Insurance Amount (PIA), is based. Our FRA is based on the year in which we were born. For most of us it ranges from age 66 to age 67 in 2-month increments.

Taking any benefit before reaching FRA carries a permanent penalty with it. That is, starting early means you will receive more benefit checks, but each of them will be a bit smaller. This applies to Personal benefits, Spousal benefits, and Survivor benefits.

Waiting beyond our FRA to begin our Personal benefits means we earn Delayed Retirement Credits (DRC). This means that our Personal benefit checks will be a bit larger. So fewer benefit checks, but each is a bit larger. The DRCs also increase Survivor benefits for those basing their benefits off of our earnings.

Our Primary Insurance Amount (PIA) is based on our Average Indexed Monthly Earnings (AIME) using a calculation using Bend Points. Our AIME is derived from our highest 35 years of wage-adjusted income using a rather complicated calculation process.

Social Security benefits are designed to supplement our other income sources after we are no longer working. Therefore, the program includes an Annual Earnings Test (AET) that generally applies to benefits taken before we reach our FRA. This creates a reduction in benefits based on our monthly earnings.

With decisions on when to start various benefits the challenge is always how to maximize your benefit. By a large margin, most people fail to maximize their benefits. The basic principles provided on this website will not enable you to maximize your benefit, but hopefully will enable you to get to the general range.