Social Security benefits are one of the most important sources of retirement income for most Americans. Because these benefits are guaranteed to last for life and to increase as costs rise, they're essential for most retirees to maintain their standard of living.
Unfortunately, many people inadvertently do things that reduce the amount of their Social Security checks. If you don't want to end up living on less, make sure you understand the impact these four actions will have on your income.
1. Claiming benefits early
Under the laws governing Social Security, every retiree has a full retirement age (FRA), which depends upon the person's birth year. FRA is between 65 and 67, with anyone born in 1960 or later scheduled for full retirement at 67.
If you claim benefits prior to your FRA, you'll get smaller benefits than if you had waited. The standard benefit you'd be entitled to at your full retirement age is reduced by a small amount for each month you claim early. This reduction amounts to about a 6.67% decrease in benefits if you file one year early and goes up from there (click here to see exactly how much your benefit will shrink based on how early you file).
The Social Security system is designed based on actuarial tables so beneficiaries should theoretically get the same total benefits regardless of when they first claim them. But waiting longer to get larger checks often makes sense if you live long enough to break even. And if you wait beyond your FRA, you can even earn delayed retirement credits that increase your benefits further.
2. Retiring before you work 35 years
Social Security benefits are calculated based on your earnings over your career. The formula is complicated but basically involves the Social Security Administration (SSA) adjusting wages for inflation, figuring out the average you earned, and giving you a percentage of your average wages as your benefit.
When calculating your average wage, the SSA considers the 35 years in which you earned the most, after adjusting for inflation. Unfortunately, anyone who works less than 35 years will end up with a lower average wage because some years of no income are added in. That can bring down an average wage quite a bit. And the more years with no earnings being factored in, the lower your benefits will be.
If you haven't put in 35 years on the job, consider continuing your career for a little longer to avoid having your average dragged down and benefits reduced because of it.
3. Quitting work while you're at peak earnings
If you're like most people, you'll start out at an entry-level job and increase your income as you gain more skills and seniority. This could mean you hit your peak earning years just when you start to think about leaving the workforce to retire.
If that sounds like your situation, remember the formula described above in which the SSA figures out average wages based on your highest-earning years. If you're earning a lot more now than early on and you retire anyway, you forgo the opportunity to replace years of low wages with years of higher ones in the SSA's calculation. This may not make sense for you, especially if you have many years being factored into your benefits formula when your income was considerably lower than it is now.
If you work just a few extra years, you could potentially raise your average wage considerably, thus getting higher benefit checks for the rest of your life.
4. Working while receiving early benefits
If you start getting Social Security at full retirement age or later, you can work as much as you want and won't see a reduction in benefits. But if you claim benefits early and earn a paycheck, you could see your checks reduced.
You're allowed to earn a certain amount before seeing a reduction in benefits, with the limit changing each year. In 2019, if you reached FRA during the year but worked and claimed benefits before reaching it, you'll see a reduction in your Social Security checks after earning $46,920. If you claimed benefits, worked, and wouldn't hit FRA at all until later years, you'd see a reduction once your income reached $17,640.
If your checks are reduced due to working, benefits are recalculated once you hit FRA to account for the money you didn't get so you don't lose the money forever. But it can take a long time to break even, so consider whether earning a paycheck is actually worth the cut to your Social Security income.
Make sure you understand what could affect your benefits
In some cases, working while receiving benefits or claiming Social Security early could make sense for you. There could also be times when you need to leave the workforce despite the fact doing so will reduce your checks. The key is to understand how the decisions you're making will affect your benefits so you can make a fully informed choice about what's right for you.