5 Social Security Terms You Need to Know
As you approach the exciting (but often overwhelming) milestone of retirement, the topic of Social Security comes up much more often, and it is easy to see why. Nearly nine out of ten individuals age 65 and older receive Social Security benefits, and—as an average—these benefits comprise about 33% of the income of older Americans. As retirement age comes around the bend, you will have to make a decision that will affect these benefits for the rest of your life: when to start taking Social Security.
To help you reach a confident decision, you first need to understand the terms. That is why I have compiled a list of 5 terms that you are likely to hear thrown around on the news, in articles, or in conversations with friends or professional advisors. Let’s get started.
1. Primary Insurance Amount (PIA)
Your PIA is your full retirement benefit based off 35 of the highest earning years of your career. So, that is why it often pays off to work a couple more years if you are making the most you’ve ever made: it could have a significant effect on your PIA! You will receive this full retirement benefit if you wait to collect your benefits at your full retirement age (which I will discuss next).
2. Full Retirement Age (FRA)
The FRA, as I previously said, is the age that you can receive your full, unreduced retirement benefit. If you take it early (for instance, at 62), your benefit will be reduced. And if you delay beyond your FRA, it will be greatly increased! This age used to be 65 for everyone, but it is gradually increasing each year. If you were born between 1943 and 1954, your FRA is 66. If not, you can find out your FRA here.
3. Break-even Point/ Break-even Analysis
When I am discussing when to take Social Security, I always remind people that it is a tradeoff. You can have more, smaller checks now or fewer, bigger checks later. For example, if you claim at 62 right now rather than 66, you will receive 4 more years worth of checks (48 to be exact), but those checks will be 25% smaller.
The break-even point then, is the age when the decision to delay starts paying off. Depending on how you think about Social Security, this can be an important
determination if you have a much lower than average life expectancy. Why? Because you may not live long enough for the bigger checks to pay off.
For a more concrete, thorough explanation of the break-even point, click here.
4. Survivor Benefits
If someone dies, they can pass on their full benefit to their spouse (or child or parent in special cases). This benefit, called a survivor benefit, can replace the spouse’s benefit if it is higher. This is important to consider, especially for the “breadwinner” of the family. If you are main income earner, it pays even more to wait to take Social Security because your benefit can outlive you, making your personal break-even point (see above) less important.
5. Cost of Living Adjustment (COLA)
The government realizes that inflation can reduce the buying power of your benefit. Therefore, Social Security increases your benefit every year to keep up with inflation. This is called a COLA, which—although not a carbonated beverage—is also quite refreshing. (Please forgive my lame joke.)
Well, there you have it! If you read through this whole post, you have familiarized yourself with some of the most confusing acronyms and terms you will likely encounter as you explore Social Security. My hope is that this will aid your understanding as you look to make one of the most important decisions of your retirement: when to take Social Security.
Wondering When You Should Take Social Security?
Read our blog entitled “When to Take Social Security—4 Questions to Ask Yourself Before Making a Decision?” This is a great primer to get you started.