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3 Mistakes 100% Guaranteed to Shrink Your Social Security Checks

By Christy Bieber - Mar 28, 2021 at 6:07AM

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Will you end up with less money to fund your retirement?

Retirement can be more expensive than you expect, especially if you incur significant healthcare expenses. While Social Security alone can't support you, it's likely to be an important source of income that's crucial to meeting your needs in your later years.

That's why you can't afford mistakes that reduce your retirement benefits. Unfortunately, far too many seniors do make decisions that shrink their payments. Here are three of them.

Older couple reviewing paperwork with financial advisor.

Image source: Getty Images.

1. Retiring before FRA

Everyone who qualifies for Social Security checks has a standard benefit amount that's based on their average earnings. But not everyone receives the standard amount, because you must retire at FRA to get it.

FRA stands for full retirement age, and it's determined by when you were born. It could be as early as 66 and two months or as late as age 67. If you retire prior to it, you're 100% guaranteed to shrink your monthly checks due to early filing penalties.

These penalties apply for every month your checks start ahead of FRA. While the penalty that applies each month isn't huge, it adds up. Specifically, you'll see a benefits reduction of 6.7% for each of the first three years. And if you retire more than three years before FRA, you'll lose an additional 5% annually. 

When you add up these penalties, a senior with a full retirement age of 67 who claimed at the earliest possible age of 62 would see a whopping 30% reduction in their monthly check.

2. Forgoing delayed retirement credits

Surprisingly, even claiming at FRA will leave you with a check that's smaller than the maximum you could've received. That's because claiming retirement benefits at FRA means you'll earn no delayed retirement credits.

When you wait a month or more past FRA, you start earning these credits. They permanently raise your monthly payment. Again, each credit isn't huge. But they add up to an 8% annual increase in the size of your checks.

Delayed retirement credits can't be earned forever. You'll get them only until you hit 70, after which there's no advantage to waiting any longer to start benefits. And if you're claiming spousal benefits, you can't earn delayed retirement credits at all. 

But for those who are eligible, missing out on this income boost definitely leads to checks that are smaller than they could've been.

3. Working fewer than 35 years

Remember when I mentioned that your standard benefit is based on your average wages over your career? It's helpful to be a little more specific. It's not your whole career that matters. Instead, it's the 35 years when your earnings were highest (after adjusting for inflation). 

The Social Security Administration gives you benefits equaling a percentage of your average wages during that crucial 35-year period. But if you don't have such a long work history on the books, the benefits formula doesn't change.

To be clear, you can still get some benefits (usually, you need to work only 10 years to become eligible based on your own work history). But the Social Security Administration factors in $0 wages for however many years you're short. If you worked only 30 years, you'd have five zeros dragging down your average.

Obviously, this will lower your average considerably and lead to a reduction in the size of your monthly check. 

Should you avoid shrinking your Social Security check?

When you need the largest monthly income from Social Security, making any of these three mistakes will cost you. But remember, lifetime income and monthly income aren't necessarily the same.

In some cases, you end up collecting more money over time if you claim Social Security early, rather than late -- even though you reduce the size of each check. That could happen if, say, you claimed Social Security at 62 and passed away at 65. Had you waited to try to get higher benefits, you'd have ended up with nothing.

Still, for many people, maxing out their monthly checks is the smartest approach. Before you claim benefits, think seriously about whether you're likely to do the same. If so, you could really regret making any of these three moves. 

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