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2 Social Security Rules Every Early Retiree Should Know

By Christy Bieber – Dec 5, 2021 at 7:35AM

Key Points

  • Social Security has many complicated rules.
  • Understanding how the retirement benefit program works can affect your monthly income.
  • It's important to make fully informed choices when making decisions about when to claim benefits.

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Seniors need to understand this important benefits program.

Chances are, you're counting on Social Security benefits to make up part of your retirement income. Most people rely on these benefits but may not realize the decisions they make regarding their Social Security checks can affect the amount of money they end up receiving.

While there's a lot of complicated Social Security rules that apply in different situations, such as to married couples, there are two basic rules every senior considering early retirement needs to know in order to avoid accidentally ending up with far less money than they expect from Social Security. 

Older people talking with financial advisor.

Image source: Getty Images.

1. Claiming benefits early permanently reduces them

If you retire early, chances are good you'll be leaving work before reaching your full retirement age (FRA) for Social Security. Your full retirement age is when you become entitled to receive your primary insurance amount, or PIA. Your PIA is your standard benefit based on a percentage of your average wages. 

Full retirement age is between 66 and 2 months and age 67. Any time you claim benefits before this time, you're subject to early filing penalties. These penalties apply for each month you've claimed ahead of FRA. So if you claimed benefits at 66 when your FRA was 66 and 2 months, you would be subject to two months' worth of them. 

The early filing penalties imposed by Social Security's benefits formula reduce your PIA by 5/9th of 1% per month for the first 36 months. If you start checks more than three years early, the reduction equals 5/12th of 1% for each additional month. These penalties add up. For each full year you claim benefits ahead of FRA, you lose 6.7% for the first three years and 5% for each prior year.

This benefit reduction can leave you with a Social Security benefit that's as much as 30% smaller than the amount you'd have received at FRA. If you'll be relying on Social Security to make up a big part of your annual income, you could come to regret shrinking your checks. 

2. If you work less than 35 years, your average benefit will be smaller

Early retirement could also mean that your total career spans less than 35 years, which could also shrink your Social Security checks.

Benefits are based on average wages, as mentioned above. But the Social Security Administration has a specific formula for figuring out what your average wages are. The SSA adjusts your wage history for inflation and then takes an average of what you earned in the 35 years when your income was the highest.

If you've worked less than 35 years, the formula remains the same, but the SSA simply considers your wage to be $0 in some years. As a result, your benefits shrink, because the inclusion of zero dollars when your benefits are calculated results in a reduction of the average wages that determine your primary insurance amount. 

Making sure to stay on the job for at least 35 years allows you to avoid this reduction. And, if you had some early years when you didn't earn a lot but your salary is higher late in life, working for additional years could pay off in raising your benefit. In this situation, higher-earning years could replace lower-earning ones in the calculation of your average wage. 

All this said, you may decide you're OK with smaller benefits because early retirement is important to you. But just be sure you know the potential consequences of leaving the workforce at a young age. 

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