Retirement is a significant milestone in anyone’s life. It marks the end of a person’s active working life and the beginning of a new phase that is often associated with leisure, relaxation, and the pursuit of personal interests. One of the key factors that determine when a person can retire is the Full Retirement Age (FRA). This article provides a comprehensive glossary on Full Retirement Age and its implications on retirement.
The Full Retirement Age, also known as the ‘normal retirement age’, is the age at which a person is eligible to receive full retirement benefits from Social Security. It is a concept that originated in the United States but is now used in many countries around the world. The FRA varies depending on the year of birth and the specific retirement system. Understanding your Full Retirement Age is crucial for retirement planning as it impacts the amount of benefits you receive and when you can start receiving them.
History of Full Retirement Age
The concept of Full Retirement Age has its roots in the Social Security Act of 1935, which was enacted during the Great Depression to provide a safety net for older Americans. The original Full Retirement Age was set at 65, a figure that was based on the average life expectancy at the time. However, as life expectancy has increased over the years, the Full Retirement Age has been gradually adjusted upwards.
It’s important to note that the Full Retirement Age is not a fixed number but a moving target. It is adjusted periodically to reflect changes in life expectancy and the financial health of the Social Security system. The Full Retirement Age has been increased several times since the inception of Social Security, and it is likely to be adjusted further in the future as people continue to live longer.
Impact of Increasing Life Expectancy
Increasing life expectancy has been one of the main drivers behind the upward adjustment of the Full Retirement Age. As people live longer, they spend more years in retirement, which puts additional strain on the Social Security system. By increasing the Full Retirement Age, the government can reduce the number of years that people receive benefits, thereby easing the financial burden on the system.
However, the increase in life expectancy is not uniform across all segments of the population. Some groups, particularly those with higher incomes and better access to healthcare, have seen much larger increases in life expectancy than others. This has led to concerns about the fairness of increasing the Full Retirement Age, as it may disproportionately affect lower-income individuals who tend to have shorter life expectancies.
Calculating Full Retirement Age
The Full Retirement Age is determined by your year of birth. For those born between 1943 and 1954, the Full Retirement Age is 66. For those born in 1960 or later, the Full Retirement Age is 67. For those born between 1955 and 1959, the Full Retirement Age gradually increases from 66 to 67.
It’s important to note that these are the current Full Retirement Ages as set by the Social Security Administration. However, as mentioned earlier, the Full Retirement Age is subject to change and may be adjusted in the future to reflect changes in life expectancy and the financial health of the Social Security system.
Impact on Retirement Benefits
The Full Retirement Age has a direct impact on the amount of retirement benefits you receive. If you start receiving benefits at your Full Retirement Age, you will get 100% of your monthly benefit amount. However, if you start receiving benefits before your Full Retirement Age, your monthly benefit amount will be reduced. Conversely, if you delay receiving benefits until after your Full Retirement Age, your monthly benefit amount will be increased.
The reduction or increase in benefits is calculated based on the number of months before or after your Full Retirement Age that you start receiving benefits. The exact percentage of reduction or increase varies depending on your year of birth and the number of months involved.
Early Retirement and Full Retirement Age
While the Full Retirement Age is the age at which you can receive full retirement benefits, it is not the earliest age at which you can start receiving benefits. The earliest age at which you can start receiving Social Security retirement benefits is 62, regardless of your Full Retirement Age. This is known as early retirement.
However, taking early retirement comes with a cost. If you start receiving benefits before your Full Retirement Age, your monthly benefit amount will be permanently reduced. The reduction is based on the number of months you start receiving benefits before your Full Retirement Age.
Calculating Early Retirement Reduction
The reduction for early retirement is calculated based on the number of months you start receiving benefits before your Full Retirement Age. The reduction is 5/9 of 1% for each month up to 36 months. If the number of months exceeds 36, the reduction is 5/12 of 1% for each additional month.
For example, if your Full Retirement Age is 66 and you start receiving benefits at 62, the number of reduction months is 48. The reduction for the first 36 months is 20% (36 months times 5/9 of 1%), and the reduction for the additional 12 months is 5% (12 months times 5/12 of 1%). Therefore, your total reduction is 25%, and you will get 75% of your full retirement benefit.
Delayed Retirement and Full Retirement Age
Just as you can start receiving benefits before your Full Retirement Age, you can also delay receiving benefits until after your Full Retirement Age. This is known as delayed retirement. If you delay receiving benefits until after your Full Retirement Age, your monthly benefit amount will be permanently increased.
The increase is based on the number of months you delay receiving benefits after your Full Retirement Age. The increase is 2/3 of 1% for each month, or 8% for each full year. The increase applies until you reach age 70, after which there is no additional increase for delaying benefits.
Calculating Delayed Retirement Increase
The increase for delayed retirement is calculated based on the number of months you delay receiving benefits after your Full Retirement Age. The increase is 2/3 of 1% for each month, or 8% for each full year. For example, if your Full Retirement Age is 66 and you start receiving benefits at 70, the number of increase months is 48. Therefore, your total increase is 32% (48 months times 2/3 of 1%), and you will get 132% of your full retirement benefit.
It’s important to note that the increase for delayed retirement is not compounded. It is a simple interest increase, not a compound interest increase. This means that the increase is calculated based on the original benefit amount, not the increased amount.
Conclusion
Understanding your Full Retirement Age and how it impacts your retirement benefits is crucial for retirement planning. Whether you decide to take early retirement, delay retirement, or retire at your Full Retirement Age, the decision should be based on a thorough understanding of the implications and your personal circumstances.
Remember, retirement planning is not a one-size-fits-all proposition. What works for one person may not work for another. Therefore, it’s important to consider all factors, including your health, financial situation, and personal goals, when making your retirement decisions.
