Social Security can be a lifeline for millions of retirees. For some older adults, benefits are their primary (or only) source of income.
However, many different factors will affect your benefit amount. While some of these factors may be outside your control, there are others you can manage. When you're aware of these three sneaky things that could reduce your benefits, it will be easier to maximize your monthly payments.
1. You worked for fewer than 35 years
Your primary benefit amount is based on an average of your earnings throughout the 35 years of your career that you earned the most. The Social Security Administration will average those earnings, adjust them for inflation, then run that number through a complex formula to determine your benefit.
If you haven't worked for at least 35 full years, you'll have zeros added to your average to account for any time you weren't working. This will result in a smaller earnings average and a lower benefit.
2. You're claiming before your full retirement age
Your basic benefit amount (or the amount based on your career earnings) is how much you'll receive if you file at your full retirement age (FRA). Your FRA will depend on the year you were born, but it's age 67 for anyone born in 1960 or later.
It is possible to file for benefits before your FRA, but doing so will reduce your monthly payment. In fact, if you have an FRA of 67 and claim as early as possible at age 62, your benefit will be reduced by 30% per month.
One common misconception about claiming early is that you'll start receiving a higher benefit once you reach your FRA. In reality, though, these adjustments are permanent. If you file early, you'll receive smaller checks for the rest of your life.
While there's nothing necessarily wrong with claiming early, it's important to know how your age will affect your benefit amount. Filing before your FRA can reduce your benefits by hundreds of dollars per month, and if you're not expecting that reduction, it could throw a serious wrench in your retirement plans.
3. You're working while on benefits
It's becoming more common for older adults to continue working in retirement, and that can be a smart idea -- especially if your savings are falling short. However, if you're working while receiving Social Security, your benefits could be reduced dramatically.
First, it's important to note that this only applies to those under their FRA. If you've already reached your FRA and are continuing to work, your income will not affect your benefit amount at all.
If you're under your FRA, though, you'll be subject to the retirement earnings test. This is essentially an income limit that will determine how much, if any, of your benefits will be withheld based on your earnings from your job. There are two different limits, depending on whether you'll reach your FRA this year:
| Income Limit | Benefit Reduction | |
|---|---|---|
| If you won't reach your FRA in 2024 | $22,320 per year | $1 reduction for every $2 over the limit |
| If you will reach your FRA in 2024 | $59,520 per year | $1 reduction for every $3 over the limit |
Data source: Social Security Administration. Table by author.
So, for example, say you're 65 years old with an FRA of 67 and you're earning $30,000 per year at your job. Since you won't be reaching your FRA this year, you're subject to the $22,320 annual income limit. Your wages are $7,680 over that limit, so your benefits would be reduced by $3,840 per year -- or $320 per month.
Fortunately, these reductions are not permanent. Your benefit will be recalculated once you reach your FRA to account for any money that was withheld, and you'll start receiving larger payments. But in the years leading up to your FRA, your benefits could be reduced by hundreds of dollars per month, depending on your income.
Social Security can go a long way in retirement, and if you'll be relying on your benefits, it pays to maximize your monthly checks. By being aware of how your benefits are calculated, you can take steps to squeeze every penny out of Social Security.
