Millions of retired Americans count on Social Security to pay their bills, but many rush to claim benefits without thinking it through. The result? Seniors are consistently shortchanging themselves, and it's all because they don't commit a single number to mind: their full retirement age.
In fact, a 2017 Fidelity survey revealed that just 26% of Americans could correctly identify their full retirement age for Social Security purposes. But if you don't know that number, you might file at the wrong time -- and reduce a critical retirement income stream as a result.
Your filing age matters
Your Social Security benefits are calculated based on how much you earned during your top 35 working years. But the age at which you initially file for benefits can cause that number to fluctuate. If you wait until full retirement age to collect benefits, you'll get the full amount your earnings record entitles you to. But if you file ahead of full retirement age, you'll reduce your benefits for each month you claim them early.
How much of a hit are we talking about? Social Security benefits are reduced by about 6.67% a year for the first three years you file early and by 5% for each year thereafter. Therefore, if your full retirement age is 67 but you claim benefits at the earliest possible age of 62, you'll reduce them by 30%.
Some people think that they can file early, take an initial hit on benefits, and then have those payments made whole once full retirement age kicks in. Not so. Unless you manage to withdraw your benefits application within a year of filing and repay every cent you collected from the Social Security Administration, the benefit amount you start out with will be the amount you receive for life. Therefore, if you're planning to file ahead of full retirement age, know that you could end up losing out on a substantial amount of income in your lifetime.
Of course, some people file early despite that reduction because they don't need the money, but rather, they want the money to enjoy retirement while they're a bit younger. If that's the situation you're in, then filing early might not hurt you. But if you're low on savings and are counting on Social Security to cover many of your basic living expenses, then you'd be wise not to reduce your benefits on a permanent basis. Or, to put it another way, if you don't wait until full retirement age to file, you could end up struggling more than necessary during an already financially precarious period of life.
Know your full retirement age
There's no universal full retirement age for Social Security recipients. That age is based on your year of birth, as follows:
|Year of Birth||Full Retirement Age|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.
That said, there is one scenario in which you don't necessarily want to wait until full retirement age to claim your benefits, and it's when your health is poor. If you pass away at a relatively young age, you'll generally get more from Social Security in your lifetime by filing as early as you can.
Imagine your full retirement age is 67, at which point you're entitled to a $1,600 monthly benefit. If you file at 62 instead, you'll collect just $1,120 a month, but you'll get 60 more individual payments. You'll break even in both scenarios at roughly age 78 1/2 -- meaning, by that point, you'll have collected the same lifetime total regardless of whether you filed at 62 versus 67. If you only live until 73, however, you'll come away around $32,600 ahead by virtue of filing at 62.
In fact, filing for Social Security at your precise full retirement age doesn't always make sense. There are some scenarios in which it pays to claim benefits sooner, and it often pays to delay benefits until age 70, because in doing so, you'll accrue credits that boost your payments by 8% for each year you hold off past full retirement age. The key, however, is to know what your full retirement age is and let it guide your decision accordingly.