Most retirees need all the income they can get their hands on. Between healthcare costs, living expenses, and the unexpected emergencies that pop up at any stage of life, it's not unusual for retirees to find themselves strapped for cash. It's unfortunate, then, that countless retirees fall into the exact same trap: losing out on a good $4,000 a year in retirement. Here's where so many go wrong.
Getting your full Social Security benefits
Your Social Security benefits are calculated based on your lifetime earnings. Once you reach your full retirement age, as determined by the Social Security Administration based on your year of birth, you can begin collecting those benefits in full. For today's 62-year-olds (those born in 1954), the full retirement age is 66.
That said, you don't actually have to wait until your full retirement age to start collecting Social Security, and most Americans don't. These days, 62 is the most popular age to start taking Social Security because it's also the earliest age at which Americans are eligible for benefits. But claiming early comes at a cost -- namely, a reduction in benefits. For every year you collect early, you'll lose 6.67% of your benefits for up to 36 months, and then 5% of your benefits beyond that point. So if you claim Social Security at 62 when your full retirement age is 66, you'll wind up losing 25% of your benefits.
Now if you're wondering whether your full benefit amount gets reinstated once you do reach your full retirement age, the answer is no. Once you start taking benefits at a reduced rate, you're locked into that rate for the rest of your life -- which is why collecting early could mean losing out on thousands of dollars each year in retirement.
How much do you stand to lose?
So just how much money are we talking about? The average monthly Social Security benefit is currently $1,341, but claiming four years early knocks that amount down to $1,006 -- a $335 monthly reduction. Over the course of a year, that's just over $4,000 in lost money.
Of course, claiming Social Security early does mean getting your hands on those benefits a few years ahead of schedule. But if you live a long life, you'll wind up losing out in the long run. Let's say your full benefit amount is $1,341, but you claim at 62 and cut it down to $1,006. Let's also assume that you wind up living until age 85. Over the course of that 23-year period, you'll collect $1,006 per month for 276 months, for a grand total of about $277,600 in lifetime Social Security benefits.
But watch what happens if you don't claim early and instead wait until 66: Over the course of that 19-year period, you'll collect $1,341 a month for 228 months, for a grand total of almost $306,000.
Now let's be superoptimistic and assume you wind up living until age 95. Using the same numbers, claiming at 62 would leave you with a lifetime benefit of $398,000. Waiting until age 66, however, would give you about $466,600 -- a difference of close to $70,000. While claiming Social Security early does make sense if you're in poor health and don't expect to live past your mid- to late 70s, unless you have a strong reason to believe you're not going to make it to 80 or beyond, taking benefits at 62 means losing out on thousands of dollars a year at a time when you really need that money.
Holding off on benefits
Want a good way to avoid taking benefits early? Work longer. Not only is it good for your finances, but it's also good for your health. If working full-time past age 62 isn't an option, consider part-time work. If you can earn enough to get by without Social Security for a few extra years, you'll avoid taking a hit on benefits once you reach your full retirement age.
Better yet, if you manage to hold off on taking benefits past your full retirement age, you'll be rewarded with an 8% increase in benefits per year until you reach age 70. Claiming benefits at 68 when your full retirement age is 66, for example, means turning $1,341 a month into $1,555 a month -- for the rest of your life.
While some people have no choice but to collect Social Security early, if you wait until your full retirement age, you can avoid joining the ranks of retirees who lose out on thousands of dollars in annual benefits. And at a time in your life when every dollar counts, that's a move that could really pay off in the long run.
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