Social Security can make or break retirement for many older adults, so it's wise to make the most of your benefits.
Fortunately, there are many factors within your control when it comes to how much you'll receive. If you're closing in on retirement, beware of these three sneaky moves that could cause you to receive less than you expect from Social Security.
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1. Working fewer than 35 years
Your benefit amount is calculated by using an average of your career earnings, but only your 35 highest-earning years are included in those calculations.
The Social Security Administration will average those earnings, run them through a complex formula, and adjust for inflation. The result is your primary insurance amount, or the benefit you'll receive by filing at your full retirement age.
If you haven't worked for at least 35 full years by the time you begin claiming, you'll have zeros included in your average to account for any time you were not working. That will bring down your average, resulting in a smaller benefit amount.
2. Claiming before your full retirement age
The age you begin claiming will have a direct impact on the size of your payments, and filing earlier than your full retirement age (FRA) will result in smaller checks each month. In some cases, this could shrink your monthly payments by several hundred dollars.
Your FRA will depend on the year you were born, but it's age 67 for everyone born in 1960 or later. The average benefit at that age is around $1,884 per month, according to 2023 data from the Social Security Administration. Meanwhile, the average benefit at age 62 (which is the earliest you can file) is just $1,298 per month -- a difference of around $586 per month.
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Now, there are valid reasons to consider claiming early. For example, if you have a healthy retirement fund and want to retire in your early 60s, filing before your FRA can make that more affordable. But filing early will permanently reduce your payments, so it's important to be aware of how much this move will affect your finances before you make your decision.
3. Owing taxes on your benefits
Social Security benefits can be subject to both state and federal income taxes, but it's possible to get out of paying one or even both types.
Currently, 41 states do not tax Social Security benefits, so there's a good chance you're already off the hook in that department. But federal taxes affect everyone regardless of where you live, and whether or not you owe anything will depend on a figure called your provisional income.
Your provisional income is half of your annual Social Security benefit plus your adjusted gross income and any nontaxable interest. If you're collecting $20,000 per year in benefits while withdrawing $40,000 annually from your 401(k), for example, that's a provisional income of $50,000 per year.
| Percentage of Your Benefits Subject to Federal Taxes | Provisional Income: Individual Tax Filers | Provisional Income: Married Couples Filing Jointly |
|---|---|---|
| 0% | Less than $25,000 per year | Less than $32,000 per year |
| Up to 50% | $25,000 to $34,000 per year | $32,000 to $44,000 per year |
| Up to 85% | More than $34,000 per year | More than $44,000 per year |
Source: Social Security Administration. Table by author.
One important caveat, though, is that Roth account withdrawals (such as from a Roth 401(k) or Roth IRA), do not count toward your provisional income. If the majority of your savings are in this type of account, it could reduce your provisional income enough to land you in a lower tax bracket -- or get you out of paying federal taxes on your benefits altogether.
Your Social Security strategy can affect your monthly payments for the rest of your life, so it's wise to ensure you know which factors influence your benefit amount. While there's not necessarily a wrong choice when it comes to claiming, understanding your options can help you head into retirement as prepared as possible.
