Millennials Are at Serious Risk of Shrinking Social Security Checks by 30%

Most millennials are a long way away from claiming Social Security. But that doesn’t mean members of this generation shouldn’t be thinking ahead to the day when their benefits begin — especially since an accurate estimate of the retirement income they’ll produce is essential for setting savings goals.

Unfortunately, recent research shows that if young people follow through on their current retirement plans, they’re at serious risk of shrinking Social Security benefits by 30%. Here’s why members of this generation could end up with less retirement money than they may anticipate.

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Why are millennials at risk of reduced Social Security benefits?

According to the Allspring Retirement Study, the average age when millennials expect to retire is 61. It’s this anticipated early retirement that puts them at risk of smaller Social Security payments.

Every retiree is entitled to receive their standard benefit at their full retirement age (FRA). This standard benefit equals a percentage of average wages, and the full retirement age when it becomes available is determined based on birth year. For anyone born in 1960 or later, which is every millennial, FRA is age 67.

Therefore, if millennials retire at the average planned age of 61, this would mean leaving the workforce a full six years prior to FRA. Of course, there’s no requirement they claim Social Security benefits right away. In fact, since these benefits only become available starting at 62, younger Americans who anticipate quitting at 61 would be forced to wait at least a year after giving notice for their first retirement check.

Unfortunately, many people who end up leaving work at 61 wouldn’t be able to wait until 67 to start Social Security — or even wait much beyond 62 — because it’s difficult to rely on savings as a sole income source without these benefits. And any early retiree who started their checks at the youngest possible age would find themselves facing a 30% benefits cut.

Why does claiming Social Security benefits early reduce the income they provide?

There’s a simple reason claiming Social Security at 62 when your full retirement age is 67 can result in a 30% reduction in monthly income. Early filers are subject to penalties resulting in a benefits reduction of five-ninths of 1% per month for each of the first 36 months and an additional five-twelfths of 1% for each prior month that benefits are received ahead of FRA. These penalties exist because Social Security was designed to provide an equal amount of income to both early and late filers, with those who claim sooner receiving smaller checks since they get more of them over time.

If a millennial retires at 61 and starts benefits as soon as they can at 62, they’d be hit with the maximum amount of early filing penalties — five years’ worth. That adds up to a 30% total benefits reduction, so a senior who would’ve received a standard benefit of $1,800 would be left with just $1,260. This can be a shocking decline in income for those who weren’t expecting it.

Younger workers who are looking ahead to retirement and hoping to leave work at 61 shouldn’t necessarily give up on this dream because of the possibility of smaller Social Security checks. The key, though, is to be aware an early claim could shrink benefits and plan accordingly — either by saving enough to live on without retirement checks for several years after leaving work or by anticipating that savings will need to produce more supplementary income.

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