Most retirees have only a finite amount of funds to live on, as paychecks stop coming in and investment accounts only go so far. As a result, seniors need to understand how the decisions they make could affect the money they have available.
One of the most important of those decisions relates to when they claim Social Security. That’s because your choice of when to start retirement benefits could result in as much as a 30% cut to your monthly checks in some circumstances.
Will your decisions about Social Security lead to a huge income cut?
Seniors have tremendous flexibility in deciding when they should file for their Social Security checks to start. In fact, benefits can be claimed as early as 62, or you can wait until age 70 to get your first payment.
For many seniors, starting benefits right away seems like the most attractive option. It may seem smart to get your checks when you’re still young and can enjoy spending the money. Or you may want to begin getting benefits before any potential future cuts occur due to financial issues with Social Security’s trust fund.
However, you need to be aware of the consequences of filing for checks early, as your benefits may be significantly reduced.
The Social Security Administration has set a full retirement age (FRA) for seniors to claim their benefits. The chart below shows when your FRA is, depending on the year when you were born:
Year of Birth
Full Retirement Age
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
If you wait until this designated age, you will receive your standard benefit, based on a percentage of your average wages in the 35 years when your earnings were highest. But if you start your checks even a month before that time, your decision will result in a smaller monthly income.
Your checks shrink for each month that you’ve claimed early. They’re reduced by:
5/9 of 1% per month for each of the first 36 months (which adds up to a 6.7% annual reduction).
5/12 of 1% for each of the prior months before then (which adds up to a 5% annual reduction).
The sad reality is, this means that claiming Social Security benefits at 62 when your full retirement age is 67 ends up cutting your monthly retirement income by a whopping 30%. That’s a lot of money when you consider the fact that Social Security is your only guaranteed source of income that will definitely last for your entire retirement.
A reduced Social Security benefit also means that your future raises will be smaller, as the Social Security cost of living adjustments (COLA) that happen in most years are based on a percentage of your current benefit (in 2022, for example, retirees will get a 5.9% raise). And if you are the higher-earning spouse, your surviving spouse’s survivor benefits will be smaller as well if you’ve made an early claim.
If you want to avoid this reduction in your Social Security income, all you have to do is wait until your FRA. You could do this by working longer so you don’t need to claim Social Security so young or relying on your savings as a source of support until you reach full retirement age. Either approach could require some sacrifice, but it may pay off in the end when you have more retirement benefits to enjoy later in life.
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