Don't Claim Social Security Benefits Until You've Answered These 5 Questions

If you're like most seniors, Social Security is going to account for at least one-third of the income you'll live on as a retiree -- and there's a good chance it may account for at least half. 

Since you're probably going to end up relying on Social Security to keep you out of the poorhouse, it's a good idea to know how this program works. However, only 14% of pre-retirees know what their benefits will be, and almost double that amount of pre-retirees have absolutely no idea, according to a 2017 Fidelity Survey. 

Not knowing how Social Security works can hurt you in more ways than just making it hard to budget for retirement. If you don't know how your benefits work, you could accidentally end up reducing the amount you receive by 30% or more.  And the decisions you make could be hard -- or impossible -- to reverse once you claim benefits. 

You don't want to reduce income you're likely to depend on, so don't take your Social Security retirement benefits if you can't answer these five questions first. 

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1. What is your full retirement age?

Less than one-third of all pre-retirees responding to Fidelity knew their full retirement age (FRA).  Your full retirement age affects the amount of Social Security retirement income you'll receive. 

Social Security determines your benefits by calculating average income over 35 working years when your salary was highest. This calculation gives you your primary insurance amount, which you'll receive only if you retire at full retirement age.

If you wait and claim benefits after reaching full retirement age, you'll receive more than the primary insurance amount. If you claim before reaching full retirement age, you'll receive less. 

Your full retirement age varies depending upon when you were born. If you were born in 1960 or later, your full retirement age is 67. If you were born before 1960, your full retirement age could be anywhere from 65 for those born in or before 1932 to 66 and 10 months if you were born in 1959.

There is a table on the Social Security website to determine your full retirement age. 

2. How much will your benefits be if you sign up now?

You can find out your monthly Social Security benefit amount by visiting SocialSecurity.gov, creating an account and viewing your Social Security statement. You'll also see what your benefits would be if you retired at age 62, at your full retirement age, or at 70. 

The earliest you can claim benefits is 62, which is anywhere from three to five years before your full retirement age.  By claiming benefits early, you reduce your Social Security benefit. If you retire 36 months or less before FRA, your benefit is reduced by 5/9 of a percent for each month before FRA. If you retire more than 36 months before FRA, your benefit is further reduced by 5/12 of 1% per month for each of the earlier months. 

If your full retirement age is 67, this would mean reducing your benefit between 30% (if you claim at 62) to 6.7% if you claim at 66  The exact reduction in benefits varies by the month you begin receiving benefits. This chart provides a rough estimate of how much you'd reduce a primary insurance amount of $1,369 (around the average monthly benefit) by retiring early instead of at a full retirement age of 67. 

3. How much will your benefits be if you wait?

If you haven't reached full retirement age yet, you can avoid a reduction in benefits by waiting until your designated age. If you've reached your full retirement age, you can continue to delay in claiming benefits. If you wait, the monthly benefit amount goes up until age 70 when benefits stop increasing. The increase is based on your birth year, with those born after 1943 receiving an 8% annual boost or a jump of 2/3 of one percent for each month of delayed benefits. 

If your full retirement age was 67, for example, you'd receive 124% of monthly benefits by waiting until age 70 to retire. This chart shows an estimate of around how much extra you'd have if you waited to claim and your primary benefit amount would have been $1,369 at a full retirement age of 67. 

To determine if you should delay receiving Social Security income, you'll need to calculate your losses from going several years without benefits to see if waiting makes financial sense.

If you would have received $1,369 monthly starting at age 67 but wait until 70, you miss out on $16,428 in annual benefits for three years, which totals $49,284 in foregone Social Security income. Your benefits amount is $328.56 per month or $3,942.72 per year higher due to waiting, so it would take you 12.5 years to make up the lost benefits ($49,284 in lost benefits/$3,942.27 in extra annual income). You'd need to live until 82.5 to break even.  If you live longer, you come out ahead. 

4. Can you claim benefits on your spouse's work record?

When you look into your expected benefits amount, don't focus only on the benefits you've earned. If you're married, or divorced after a marriage lasting at least 10 years, you may be able to claim benefits on your spouse's work record instead of your own. You can claim these benefits starting at age 62, although your spousal benefit is reduced if you retire before your full retirement age.

If you wait until your full retirement age, your spousal benefit would be equal to 50% of the benefits your spouse would receive at his or her full retirement age. There are 81 different ways for married couples to claim benefits, so choosing a strategy to maximize your benefits is complicated.

One common strategy is for the higher-earner to delay claiming benefits as long as possible while the lower earner claims on his or her own work to keep the couple afloat. The higher benefit continue to accrue, and when either spouse dies, the surviving spouse can continue to receive the higher benefits in perpetuity. 

5. Will you continue to work after getting benefits?

If you've reached full retirement age, you can claim Social Security benefits, continue to work, and not experience any reduction in benefits. However, if you claim benefits early and you keep working, the monthly benefits you receive will be reduced once you earn income above annual limits. 

If you're under full retirement age for the entire year you work, your Social Security benefits will be reduced by $1 for every $2 earned above the annual limit. As of 2016, that annual limit was $16,290. If you earned $17,290, your benefits would be reduced by $500 since you earned $1,000 above the annual limit. 

If you work during the year when you reach your full retirement age, your benefits are reduced by $1 for every $3 earned above a different limit but earnings only count if you made the money before reaching full retirement age. The limit was $44,880 for those reaching full retirement age in 2017.

Once you've reached your full retirement age, there is no limit on your earnings and benefits won't be affected no matter what you earn.

Why mistakes can be so hard to undo

Almost 40% of pre-retirees responding to the Fidelity survey thought they could claim reduced benefits at 62 and have their benefits bumped up once they reached 66 -- but this's simply not the case. Once your claim your benefits, there are no do-overs unless you voluntarily stop receiving benefits.

Now that you know the truth, you won't be one of the seniors who makes this mistake. You can calculate the best age to claim your benefits, coordinate with your spouse, and maximize your Social Security income so you'll have more cash to enjoy your golden years.