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1 Social Security Mistake That Could Dramatically Reduce Your Benefits

By Katie Brockman – Feb 21, 2020 at 12:00PM

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You may not even realize you're making this mistake, but it could significantly limit your monthly checks.

Nearly everyone wants to maximize their Social Security checks, but because the program can be complicated and confusing, sometimes it's tough to know exactly how to make the most of your benefits.

More than 90% of Americans age 50 and older don't understand what factors affect the maximum Social Security benefit amount they can receive, a survey from Nationwide found. If you're unsure of how your benefits are calculated, you may unknowingly be making mistakes that could reduce the amount you'll receive. And there's one factor, in particular, that can significantly affect how much you'll collect in benefits.

Hundred dollar bill with Social Security cards

Image source: Getty Images.

How the length of your career affects your benefit amount

When calculating your basic benefit amount -- or the amount you'll receive if you begin claiming benefits at your full retirement age (FRA) -- the Social Security Administration looks at the 35 highest-earning years of your career. Those earnings are adjusted (or "indexed") to account for changes in inflation during those years. After that, those earnings are added up, divided by 35 to determine your annual average, then divided by 12 to finally result in your monthly benefit amount.

This means that if you don't work a full 35 years, that could end up being a big mistake. Although you become eligible to receive Social Security benefits once you've worked and paid Social Security taxes for at least 10 years, if you work fewer than 35 years, you'll have zeros added to your equation to account for the years you weren't working. Those zeros could bring down your overall earnings average dramatically, which will result in a lower benefit amount.

However, this also means that you have the power to increase your benefit amount by working longer. Chances are you're earning a higher annual income now than you were when you first started your career. Because the Social Security Administration only considers your 35 highest-earning years, working a few years longer now could allow you to replace some of your lower-earning years from early in your career with more recent higher-earning years. That will boost your overall earnings average and result in bigger monthly checks.

If you can't or don't want to work longer, you can also boost your benefit amount by increasing your annual income. The higher your annual income is, the higher your overall earnings average will be as well. That, in turn, will equate to more money in benefits.

The other factor that will affect how much you receive

Even if you've done everything you can to boost your basic benefit amount, you could still see your monthly checks reduced if you claim before you reach your FRA.

For those born in 1960 or later, your FRA is age 67. If you were born before 1960, your FRA is either 66 or 66 and a few months, depending on the exact year you were born. You are allowed to begin claiming benefits as early as age 62, but by doing so, you'll receive smaller checks. Those reductions can sometimes be significant, too; if you have a FRA of 67 and claim at 62, your benefits will be permanently reduced by 30%.

You can also claim later than your FRA, and by going that route, you can earn bigger checks. If you have a FRA of 67, you'll receive a 24% bonus on top of your full benefit amount by waiting until age 70 to file for benefits. Although you can claim at any age beyond 62, you won't receive any bonuses by delaying benefits past age 70. 

Now, in theory, the total amount you receive in benefits over a lifetime should be roughly equal no matter when you begin claiming. If you claim early, you'll receive smaller checks but more of them. Delay benefits, and you'll receive fewer (but bigger) checks. However, the math only works out if you live an average lifespan (roughly 85 years old, according to the Social Security Administration). If you're likely to live a much longer- or shorter-than-average lifespan, you may receive more money over a lifetime if you delay benefits or claim early.

Social Security benefits can be a confusing topic, but the better you understand how your benefits are calculated, the smarter the decisions you can make. You have the power to boost your monthly checks by working longer, increasing your income, and claiming at the right age. By doing everything you can to maximize your benefits, you can set yourself up for a more comfortable retirement.

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