Here's How Much Your Social Security Shrinks if You File Early

Social Security retirement benefits provide a lifelong source of income that goes up along with inflation. Half of married seniors and around 70% of unmarried elderly persons rely on Social Security to provide at least half their retirement income. Yet millions of preretirees don't know much about how their monthly Social Security income will be determined or what impact their actions will have on their benefits.

Filing early is one action that affects your monthly check.

One definition of filing early is to claim benefits prior to an age designated by law as your full retirement age (FRA). Depending on when your designated FRA is and the age when you first begin receiving benefits, you could cut your monthly check by as much as 30%. This reduction means you get less income every year. But because you may get more total checks than if you waited until later in life to start receiving them, your total benefits from Social Security are not necessarily reduced.

And regardless of when your FRA is, if you file before you've worked for 35 years, or if you file when you're earning the most you've ever earned and have the option to work longer and claim benefits later, you could also reduce the monthly benefits you receive over your lifetime. This is also considered a type of early filing, and in this case, you could reduce the lifetime total of benefits you get.

It's important to understand how different kinds of early filing can affect total benefits as well as the size of your monthly checks. This guide will explain what it means to file early as well as how your decisions can affect Social Security income.

Image source: Getty Images.

What does it mean to file early?

As mentioned above, filing early could mean filing for benefits prior to your full retirement age. Previously, full retirement age was 65 for everyone. However, in 1983, amendments to the Social Security system were passed and gradually made FRA later in recognition of the fact that people were living longer.

Thanks to these amendments, FRA is now between the ages of 65 and 67, depending on your birth year. The table below shows FRAs for each birth year. Filing early can be defined as claiming your Social Security benefits even one month prior to the full retirement age designated for your year of birth.

Data source: Social Security Administration.

What does it mean for your benefit to shrink?

Social Security provides you with a standard benefit, called your primary insurance amount, if you retire at FRA. You can learn the details of this formula in our guide to how much the Social Security Administration will pay you.

For now, what you need to know is that when you claim benefits prior to FRA, your primary insurance amount is reduced by a specific percentage depending on just how early you file.

This is how much your monthly benefit will shrink if you file early

The specific impact of early filing depends on just when you file, as benefits are reduced for each month you claim them prior to FRA.

The first age at which you become eligible for Social Security benefits is 62, and the oldest FRA is 67. This means you could file as much as five years (60 months) prior to your FRA. The table below shows how your monthly benefit would be affected by early filing.

Calculations by author.

This means:

• If your full retirement age is 67 and you file for benefits to begin at 66 and 11 months, you would multiply your primary insurance amount by 0.556% to see how much your benefits would be reduced. If your standard benefit was $1,400, you'd be looking at a $7.78 reduction in your monthly benefit, and you'd receive a monthly Social Security benefit of $1,392.22.
• If your FRA was 67 and you began receiving benefits at 62, you'd multiply your primary insurance amount ($1,400 in this example) by 30% (the reduction for filing 60 months early) to see a reduction of $420 per month.

How is this reduction in monthly benefits determined?

So where did all those percentages in the table above come from? The Social Security Administration reduces your monthly benefit by 5/9 of 1% per month for each of the first 36 months you file for benefits before full retirement age. To figure out how much your monthly benefit is reduced if you retire three years or fewer before FRA, you'd multiply:

• ((5/9) x .01) x # of months early

If you were retiring 23 months early, you'd multiply ((5/9) x .01) x 23 = 0.12778, or about 12.78%.

If you start collecting benefits more than 36 months early, benefits are reduced by an additional 5/12 of 1% per month for each prior month. So if you retire more than three years prior to FRA, it's a two-step calculation:

• Multiply ((5/9) x .01) x 36 = 0.20 or 20% (That's the same formula from above.)
• Add the additional benefits reduction, which is determined by multiplying ((5/12) x .01) x number of additional months early

Retiring 44 months early would thus result in a reduction equal to:

• 20% total for the first 36 months +
• ((5/12) x .01) x 8 additional months (44 months total - 36 months) = 0.033 or 3.3%.

So you'd experience around a 23.33% benefits reduction: 20% + 3.33%.

But will your lifetime benefits be lower?

As you've seen above, your standard Social Security benefit shrinks if you claim before FRA. But this doesn't necessarily mean the total lifetime benefits you get from Social Security will be lower, because two things play into your lifetime benefits: the size of your checks and how many checks you get.

If you claim benefits earlier than FRA, you get smaller checks, but you should get them for a longer period of time. For example, if you claim benefits at 62 instead of 67, you get five additional years of income from the SSA -- or a total of 60 more monthly checks than if you had waited to claim at 67.

The Social Security system aims to equalize benefits regardless of the age at which you file if you live the expected lifespan that is in the calculations.

If you live longer than the SSA projects a typical beneficiary will, you will get more total lifetime benefits if you wait to claim than if you claim as soon as you become eligible. If you live less time than the SSA projects and claim later than the first age you become eligible, you'll get less total benefits than you'd have received had you filed as soon as you could.

Of course, you can't predict how long you'll live -- but you can calculate how long you'd have to stay alive to make up for benefits lost if you don't claim them as early as possible. Doing this is called calculating your break-even point.

Calculating your break-even point if you don't file early

When deciding between claiming at two different ages, you'll need to figure out how much your benefit would be at each of those ages. Then you do some comparing.

To help you see the process, here's an example in which you're trying to decide between starting benefits at 62 and 66 when your FRA is 67 and the standard benefit you'd receive at 67 is $1,400.

• Your standard benefit amount at FRA is $1,400.
• You're comparing retiring at 62 vs. 66. If you retired at 62, your standard $1,400 benefit would be reduced by 30%, or $420, so you'd begin receiving $980 per month at 62. If you retired at 66, your standard $1,400 would be reduced by 6.67%, or $93.38. You'd begin receiving $1,306.62 at 66.
• You'd forgo four years of $980-per-month income by waiting four years to claim. So the total forgone income if you wait from 62 to 66 to claim benefits is 48 months x $980 per month or $47,040.
• Your monthly benefit at the later age would be $326.62 higher.
• Divide the $47,040 in missed income by the $326.62 extra per month you receive if you wait. This shows you'd need to receive the extra $326.62 for about 144 months (12 years) to break even for delaying.

It would take you a total of 12 years of receiving a higher monthly benefit to make up for waiting from 62 to 66 to start getting monthly Social Security benefits. Since your benefits would be starting at 66, you would have to live until 78 to break even in this example.

Living longer than 78 would result in higher total lifetime benefits, since you'd continue receiving an extra $326.62 per month for the rest of your life. But if you passed away prior to 78, your lifetime benefits would be lower due to waiting, because you'd never make up for the $47,040 in income you gave up.

Waiting until after FRA could boost your benefit further

There's one more important thing to know about how the age at which you file for Social Security benefits affects monthly income.

If you delay filing until after full retirement age, you can earn delayed retirement credits that boost your standard benefit and result in larger benefit checks. These credits can be earned until the age of 70 and could result in about an 8% increase per year in monthly benefits compared to the primary insurance amount you'd get at FRA.

You can learn more about how this works in our guide to delayed retirement credits. If you're considering delaying your benefits claim beyond FRA to earn these credits, remember, you need to analyze how long it will take you to break even for missing years of income.

To do this, you'll need to calculate your break-even point in a similar way as described above -- but you have to account for the increase that comes from delayed retirement credits. This increase is 2/3 of 1% per month you wait to claim after FRA up until the age of 70. So if you were retiring 12 months after FRA:

• Multiply 12 x (2/3 x .01) to calculate the increase in benefits due to waiting for one year after FRA. In this case, it's a 0.08 or 8% increase.
• Use the steps described above in the section on calculating your break-even formula to see how long you'd have to receive the higher benefit to make up for waiting.

Remember, if you're waiting until age 68, 69, or 70 to claim benefits, you're forgoing even more years of potential Social Security checks, so you will need to live long enough to make up for that missed money.

There's another way your benefits could shrink if you file ASAP

In the above example, filing before age 70 can shrink monthly benefit checks compared to the maximum you could receive. But it won't necessarily reduce lifetime benefits, because total benefits will depend on how long you live.

However, your benefits could also shrink for another reason if you file earlier than you could. And this time the reduction in benefits could be a permanent one that affects the total income received from the SSA.

In this case, your benefits could be smaller if you file earlier in life and your decision to claim benefits at a young age results in your primary insurance amount being lower than it would be if you waited.

Remember, your PIA is based on an average of your highest 35 years of earnings, after adjusting wages for inflation. If you file early in life, you may not get a full 35 years of work in. If you don't, some years when you earned nothing are counted, and you have some $0s factored in. Adding in $0s drags your entire average down, lowering your primary insurance amount.

Many people also hit their peak earnings later in life but don't make very much early on. Say you did work exactly 35 years, but the first three of those years were at a low-paid internship, and you earned the inflation-adjusted equivalent of $3,000 per year. Now, however, you've got a great job and are making $90,000 per year. If you quit work and file for Social Security benefits now, those first three years of low wages would be part of your average. But if you keep working another three years, you could replace the low-earning years with high-earning ones, bringing your average wage -- and standard benefit -- higher.

If you opt to forgo the opportunity to boost average wages used to determine benefits, the resulting reduction in your PIA makes your lifetime Social Security income lower -- not just your monthly benefit.

Technically, you could file for Social Security benefits and keep working. But if you work prior to full retirement age, benefits could be reduced or eliminated if you earn too much money. You can learn more about this reduction in benefits in our guide to working while collecting Social Security.

You do eventually get back the money withheld because you earned too much money -- provided you live long enough. But there's little point in claiming benefits ASAP if you won't actually receive them because you're earning too much income.

Now you understand how much your Social Security shrinks if you file early

As you can see, filing for benefits early has a measurable impact on monthly Social Security income. Only you can decide if you'd rather start getting money early or wait to get a larger check and take the chance you won't live long enough to break even.

Just be sure to do the math on how much benefits shrink when you claim them before full retirement age so you can make a fully informed choice about what's right for your situation.