This 3-Year Gap Could Make a Big Difference in Your Social Security Benefit Amount

Do you have a plan for when you'll claim Social Security benefits? Unfortunately, there's a very good chance that the old warning about the best-laid plans often going awry is likely to apply if you do.

In fact, in one recent survey of both current and future retirees, Nationwide found future retirees anticipate taking Social Security three years later than they actually do. While the average future retiree expects to claim at 65, the average current retiree actually claimed at 62 -- the first year in which benefits became available.

Why does claiming three years earlier than planned matter? It's simple: The earlier you claim, the more your benefit is reduced, and the lower your Social Security income will be. 

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How does claiming benefits three years early affect Social Security income?

The Social Security formula used to determine the amount of benefits you'll receive calculates your primary benefit amount as if you'll retire at full retirement age (FRA). FRA depends on your birth year. If you were born in 1960 or later, it's 67. 

If you claim benefits early, benefits are permanently reduced. The benefits reduction equals 5/9 of 1% per month for each of the first 36 months before FRA that you receive benefits. If you claim more than 36 months early, your benefits are reduced by an additional 5/12 of 1% per month. This means that the earlier you claim your benefits, the bigger the decline in monthly income. 

This chart shows the impact of claiming early on your Social Security benefit amount. If your full retirement age is 67, even retiring at 65 -- as many future retirees plan -- would lead to a reduction in benefits. But the reduction in benefits wouldn't be nearly as dramatic as if you ended up retiring three years earlier at the age of 62.

Let's say your primary insurance amount would be $1,404 monthly if you retired at 67. Here's what would happen to your benefits if you retired at either 62 or 65. 

As you can see, your annual income would be affected significantly. If you'd planned to retire at 65, you'd have an annual income of $14,616 from Social Security benefits -- $2,232 less per year than you'd have received had you waited until full retirement age. But, if you retire three years earlier than expected at 62 instead of 65, your annual income would go down another $2,820 to $11,796. The reduction in benefits is bigger because now you're retiring more than 36 months before FRA, so benefits are being reduced by that additional 5/12 of 1% per month. 

That three-year gap has an outsize impact on the Social Security income you end up with, and it could leave you with far too little money to live on unless you have lots of other sources of income. 

This reduction in benefits is permanent 

Many future retirees don't understand how much claiming benefits an extra three years early could affect the income they receive from Social Security.

Nationwide found close to 70% of adults thought they'd be eligible for full Social Security benefits years before they actually are. The average age future retirees thought they'd be able to get full benefits is 63, which is a full four years early for anyone born in 1960 or later.  A recent Fidelity survey also revealed 38% of respondents thought benefits would automatically go up at full retirement age after claiming early, which isn't true. 

The reality is, if you start with lower benefits, Social Security income will be lower for life. Cost-of-living adjustments, or periodic increases in benefits, are based on a percentage of what you're currently receiving, so you'll never catch up to the monthly amount you'd have received had you waited to claim benefits. 

You may not have a choice about claiming early

Unfortunately, even if you understand the impact of claiming Social Security benefits years earlier than planned, you may have no choice. Many people end up having to rely on Social Security earlier than expected as a result of health issues, a job loss, or the need to serve as a caregiver for a family member. If you're put in a position where you're forced to claim benefits ahead of schedule, there's nothing you can do but accept the benefits reduction.

The best way to avoid this is to save early and aggressively. If you have a big nest egg and are forced to retire earlier than you want, you can live off your savings and wait to claim Social Security benefits. Or, your big nest egg will provide enough income that it won't matter if your Social Security benefits are reduced, since you'll still have plenty of cash to live comfortably. 

Be sure to plan for this three-year gap

Now that you know so many retirees are forced to claim Social Security three years earlier than expected, you can plan ahead for this possibility. Start saving as much as possible today so you have savings to rely on.

Working to increase your income can also help boost your Social Security benefits -- even if you're forced to claim early -- because income impacts the benefits you get. By taking steps now, you'll be ready to thrive even if you end up being one of the many whose expectations about when you'll claim Social Security benefits don't match your reality.