Social Security benefits can make up a considerable chunk of income for many retirees. In fact, for around 1 in 5 baby boomers, Social Security is their only source of income in retirement, according to a 2021 survey from the Nationwide Retirement Institute.
If you're going to be depending on your benefits to make ends meet in retirement, it's wise to make sure you're earning as much as possible. And there's one simple misunderstanding that could potentially cost you thousands of dollars per year.
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How your age affects your benefit amount
The age at which you begin claiming Social Security will directly affect the amount you receive each month. To receive your full benefit amount based on your career earnings, you'll need to wait until your full retirement age (FRA) to file.
However, very few people know their exact FRA. Only 16% of adults can correctly guess their FRA, according to the Nationwide survey, and among baby boomers, the average guess is 64 years old.
In reality, your FRA will fall between ages 66 and 67, depending on the year in which you were born. Those born after 1960 have an FRA of 67, while anyone born before 1960 will have an FRA of either 66 or 66 and a few months, depending on the exact birth year.
Why not knowing your FRA could be costly
When you're unsure of your exact FRA, it could impact your decision of when to begin claiming benefits -- which will, in turn, affect your benefit amount. For example, say your real FRA is 67 years old. If you were to file at that age, you'd collect $1,600 per month (which is roughly the average benefit amount among retirees).
Let's also say, though, that you mistakenly believe your FRA is age 64 and you claim at that age, expecting to receive your full $1,600 per month. However, because you're actually claiming early at age 64, your benefit amount will be reduced by 20%, leaving you with just $1,280 per month.
That comes out to $320 per month less than you expected or around $3,840 per year. Also, because your benefit amount is generally locked in for life once you file, these benefit reductions will be permanent.
At what age should you file for Social Security?
This isn't to say that you shouldn't claim benefits early because in some cases, that could be the best move. However, claiming early will result in smaller checks each month, so it's important to fully understand the impact of your decision.
Claiming early can be a smart move if you have a robust retirement fund and are eager to get a jump-start on retirement. You'll receive smaller payments each month, but if you have plenty of savings, you might not need that extra money.
However, if you have little-to-no savings and are looking to maximize your monthly income, waiting a few years to claim could be ideal. You can receive hundreds of dollars more per month by delaying benefits, and that money could go a long way if your retirement fund is falling short.
The age at which you begin claiming Social Security is a personal decision, but be sure you know how that age will affect your benefit amount. When you know your FRA and understand all of your options, it will be easier to make the best decision for your situation.
