Tens of millions of Americans rely on Social Security benefits, with many of them getting the majority of their income from the program. Although Social Security pays full benefits when you reach your official full retirement age -- currently between 66 and 67 for those nearing retirement -- you can generally get benefits earlier than that. The trade-off is that you have to accept a reduction in your monthly payments if you choose not to wait until full retirement age.
Ideally, it'd be easy to figure out exactly how much it'll cost you to claim your Social Security benefits early. However, as with many things about Social Security, getting answers is a bit more complicated. One key reason is that the rules governing reductions in benefits are different depending on which type of benefit you're looking to claim.
Here, we'll look at three different common situations and how they compare to each other.
1. Retirement benefits
The rules for retirement benefits involve two different reductions. If you claim your retirement benefits up to 36 months early, then you'll suffer a reduction of five-ninths of a percent for every month before full retirement age that you claim. For instance, if your full retirement age is 66 and you claim at 64 1/2, then your reduction will be 18 months multiplied by five-ninths of a percent, or 10%. The reduction at 63 would be 36 times five-ninths of a percent, or 20%.
If you retire more than 36 months early, then that five-ninths percent monthly reduction only applies to the first 36 months. After that, additional months incur a reduction of five-twelfths of a percent per month. So if your full retirement age is 66 and you retire 48 months early at age 62, then your reduction would be 36 times five-ninths of a percent plus 12 times five-twelfths of a percent, or 25%.
These percentage reductions don't change regardless of what your full retirement age is. For instance, the reduction of 10% for claiming retirement benefits 18 months early is the same if your full retirement age is 67 and you claim at 65 1/2. What's important is how long before full retirement age you claim.
2. Spousal benefits
Spousal benefit reductions follow similar rules as retirement benefit reductions, but the percentage amounts per month are different. For the first 36 months, the reduction in spousal benefits is 25/36ths of a percent. After 36 months, the same five-twelfths of a percent monthly reduction applies as in the retirement context.
As you can see if you do the math, that results in larger reductions in spousal benefits. Using the examples from the retirement situation, if you retire 18 months early, spousal benefits would get reduced by 18 times 25/36th of a percent, or 12.5%. Retiring 36 months early would cause a 25% drop in your monthly spousal benefit, while retiring 48 months early would reduce your benefit by 36 times 25/36th of a percent plus 12 times five-twelfths of a percent, or 30%.
As with retirement benefits, full retirement age doesn't change these percentages in the spousal benefit context. Your reduction is dependent solely on how many months early you claim your spousal benefits.
3. Survivor benefits
The rules for survivor benefits are different from those applying to other benefits. The reason is that the monthly reduction in survivor benefits does depend on your full retirement age, and the calculation gets a lot trickier.
The survivor benefit rules call for the Social Security Administration to reduce your survivor benefit by 28.5% if you claim at the earliest allowed age of 60. They also require a proportional reduction in benefits if you retire between 60 and your full retirement age. For instance, if your full retirement age is 66 and you claim survivor benefits halfway between 60 and your full retirement age at 63, then you'd get a reduction of half of 28.5%, or 14.25%. When you do the math for those whose full retirement age is 66, you come up with a reduction of 19/48 of 1% per month, or roughly 0.396%.
If your full retirement age is different, though, then the reduction will be different as well. For someone with a full retirement age of 67, the monthly reduction would be 19/56 of a 1%, or 0.339%.
Know your benefits
It's easy to think that the same rules would apply to different situations involving Social Security benefits, but unfortunately, the truth isn't as simple to understand. By being aware of the different reductions for taking early benefits, you'll be better able to plan for whatever decision you end up making.