Understanding the Impact of Retiring at Age 65
For many, retiring at age 65 is a long-held goal, aligning with Medicare eligibility and traditional retirement milestones. However, when it comes to Social Security, 65 is no longer considered the full retirement age (FRA) for most people today. For anyone born in 1960 or later, the FRA is 67. Claiming benefits before your FRA results in a permanent reduction in your monthly payment. This reduction is a key financial consideration and is distinct from the temporary penalty that applies if you work while collecting benefits before your FRA.
The percentage of reduction is determined by how many months you are short of your FRA. Claiming at 65, two years before an FRA of 67, results in a significant and permanent decrease in your monthly check. For example, if your FRA is 67, claiming benefits at 65 could mean receiving only about 86.7% of your full benefit. This adjustment is not a temporary cut; it is applied for the rest of your life. This makes a deep understanding of your personal situation and Social Security rules essential for making an informed retirement decision.
The Formula Behind Your Social Security Benefit
Your Social Security retirement benefit is calculated using a formula that takes into account your average indexed monthly earnings (AIME) over your career. The Social Security Administration (SSA) uses your highest 35 years of earnings, adjusted for inflation, to determine your AIME. A higher AIME results in a higher benefit.
How Indexed Earnings and Bend Points Work
First, the SSA indexes your earnings to reflect national wage levels at the time you earned them, ensuring your early career earnings have a modern-day value. Then, it takes the highest 35 years of indexed earnings to compute your AIME. Finally, the SSA applies a progressive formula to your AIME using specific dollar amounts called "bend points" to calculate your primary insurance amount (PIA). The bend points change each year based on the national average wage index. The PIA is the amount you would receive if you claim benefits exactly at your FRA.
- Bend Point Breakdown (for workers becoming eligible in 2025):
- 90% of the first portion of your AIME.
- 32% of the second portion of your AIME.
- 15% of the remainder of your AIME.
This progressive formula means that those with lower average earnings receive a higher percentage of their earnings back in benefits compared to high earners. If you have worked less than 35 years, zero-earning years are included in the calculation, which can significantly lower your average and, therefore, your final benefit.
Retiring at 65 vs. Other Ages: A Critical Comparison
Deciding when to claim your Social Security benefits is one of the most important financial choices you will make. It involves balancing the need for immediate income with the desire for higher lifetime benefits. The three primary claiming ages are 62 (the earliest), your Full Retirement Age (FRA), and 70 (the latest, with maximum delayed retirement credits).
Here is a comparison of how claiming at 65 stacks up against these other common ages, assuming an FRA of 67:
| Feature | Claiming at 62 (Early) | Claiming at 65 (Before FRA) | Claiming at 67 (FRA) | Claiming at 70 (Delayed) |
|---|---|---|---|---|
| Benefit Amount | ~70% of PIA | ~86.7% of PIA | 100% of PIA | 124% of PIA |
| Benefit Duration | Longest total payment years | More payment years than at FRA or 70 | Fewer payment years than at 62 or 65 | Fewest payment years |
| Lifetime Income | Lower, unless you have a shorter life expectancy | Variable, depends on life expectancy | Maximized for those with average life expectancy | Highest, for those with longer life expectancies |
| Key Consideration | Access cash early, but with a permanent reduction | Balance between early access and reduced benefit | Maximizes monthly benefit without waiting longer | Highest possible monthly benefit for life |
Factors That Influence Your Personal Benefit
Several factors beyond your claiming age influence the size of your Social Security check. Being aware of these can help you strategically plan for your retirement.
Earnings History
Your benefit amount is directly tied to your earnings history. The more you earn, up to the annual taxable maximum, the higher your potential benefit. If you continue working past 65, those later, higher-earning years can replace earlier, lower-earning years in your 35-year average, increasing your AIME and your benefit.
Cost-of-Living Adjustments (COLAs)
Social Security benefits are adjusted each year for inflation through a COLA. This ensures that the purchasing power of your benefits doesn't erode over time. Your benefit, whether it is reduced by claiming at 65 or maximized by delaying, will be subject to these annual increases for the rest of your life.
Working While Receiving Benefits
If you claim benefits at 65 but continue to work, you may be subject to the Social Security earnings test. For those below FRA, benefits are temporarily withheld if you earn over a certain limit. For 2025, for every $2 you earn over $23,400, $1 of your benefits is withheld. However, once you reach your FRA, the earnings test no longer applies, and you can earn any amount without a penalty. Any benefits withheld due to the earnings test are not lost; they are factored into a recalculated higher benefit once you reach your FRA.
Maximizing Your Benefits: Strategies to Consider
Even if you plan to retire at 65, you can still take steps to maximize your benefits. Your decision to claim benefits at 65 does not have to be an irrevocable choice for receiving a lower payment. You can coordinate your retirement strategies to optimize your income.
- Delaying Benefits: Consider working longer, if possible, to delay claiming benefits. Every year you wait between your FRA and age 70 adds an 8% delayed retirement credit to your benefit. Waiting until age 70 provides the highest possible monthly payment for life.
- Spousal Benefits: If you are married or divorced, you may be eligible for spousal or survivor benefits based on your spouse's or former spouse's earnings record. A non-working spouse can collect up to 50% of the working spouse's FRA benefit. This can be a key part of a couple's overall strategy.
- Using 'My Social Security': The Social Security Administration offers an online tool to help you get personalized estimates based on your earnings record. You can create an account and access this service for free. This is an essential step for personalized retirement planning. You can find more information about this at the Social Security Administration website.
- Work at Least 35 Years: Since your benefits are calculated based on your 35 highest-earning years, working for a full 35 years is crucial. If you have fewer years, the missing years are filled with zeros, which will lower your average and, consequently, your benefit. Working longer can replace some of those lower-earning or zero-earning years with higher income years.
The Bottom Line: Personalizing Your Retirement Strategy
Retiring at 65 can be a rewarding milestone, but it is important to go into it with a clear understanding of your financial situation. While you might be eligible for a Social Security check at 65, it is not your full benefit. Your unique earnings history, retirement goals, and health are all factors that will influence the best time to claim. By leveraging the tools available from the Social Security Administration, and considering the trade-offs of claiming at different ages, you can make a decision that is right for you. Remember that Social Security is just one piece of the retirement puzzle, and it should be considered alongside your other savings and investments for a complete picture of your financial future.
