Social Security benefits are an important income source for many seniors. If you expect these benefits to play a big role in funding your retirement, you need to understand that certain actions could shrink your monthly payments.
Specifically, if you make these three moves, you’ll end up with less money flowing into your bank account each month as a retiree.
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1. Claiming benefits before age 70
The first move guaranteed to shrink your monthly Social Security check is claiming benefits before age 70. While you can start getting benefit checks as young as 62, this will make your payment much smaller.
See, you have a full retirement age, or FRA (which is 66 and 10 months for those born in 1959 and 67 for anyone born in 1960 or later). If you claim benefits at your full retirement age, you get your standard benefit based on earnings over your working life. However, for every month you claim benefits before your FRA, there’s an early filing penalty. The penalty is pretty small each month — 5/9 of 1% for the first 36 months and 5/12 of 1% for prior months — but it adds up quickly. Those who claim at 62 instead of 67, for example, will see a monthly payment that’s 30% smaller, while claiming benefits even a year early leads to a 6.7% reduction.
Delaying a benefits claim has the opposite effect. Every month you delay the start of your benefits, you earn a delayed retirement credit that increases your monthly payments by 2/3 of 1%. Credits can’t be earned after 70, though, so waiting until then gets you the maximum monthly payment, netting you 24% more than your standard benefit.
If you don’t want to miss out on the chance to maximize your monthly checks, avoid claiming before 70. Of course, this doesn’t always mean you’ll get the most lifetime benefits, as you have to live long enough to make up for the years of missed checks to do that. Still, most retirees end up better off by waiting, and you can earn higher survivor benefits for your spouse if you’re the higher earner and you delay.
2. Retiring with less than a 35-year work history
Remember the standard benefit mentioned above — the one you get at your full retirement age? You could also end up shrinking that benefit with certain decisions you make. Specifically, if you leave work before you have a 35-year work history, your benefit will be smaller.
There’s a simple reason for that. Your benefits are based on the average wages you earn over your 35 highest-earning years. Wages are adjusted for inflation, and you get a monthly payment equal to a percentage of the average monthly earnings during that time. If you work fewer than 35 years, this doesn’t change. So, if you decide to stop working after 20 years on the job, you have 15 years of $0 wages included in your average monthly earnings — and they’ll obviously be much lower because of it.
Some retirees benefit greatly from working longer than 35 years if their income has increased over time. Each extra year working at a higher-paying job will result in a lower year being removed from the calculation of their average wages. At a minimum, though, you’ll want to avoid those $0 wage years being included if you hope to get the largest checks possible.
3. Earning too much before reaching FRA
Finally, if you claim Social Security before your full retirement age and you work while receiving benefits, you’ll also shrink your checks — or cause them to potentially disappear altogether. Once you earn $23,400 in earnings for the year, benefits are reduced by $1 for every $2 above that limit. This limit applies if you don’t reach FRA at all in the year you’re working. In the year that you reach FRA, you have a higher limit of $62,160 and lose only $1 in benefits for every $3 above that amount.
Seeing your checks shrink or vanish because you’re earning a paycheck can be upsetting if you were counting on getting income from both Social Security and a job. The good news is, your benefits are recalculated at FRA to account for the months of missed or reduced benefits, so your future payments increase. And, after FRA, you can work as much as you want without any loss to benefits, so this is just something to watch if you were hoping to double-dip after retiring at a younger age.
Ultimately, if you make any of these three moves, you are going to see a smaller monthly payment. This doesn’t necessarily mean there are never circumstances where you should do these things, but you should be aware of the consequences before you act.
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