Claiming Social Security benefits is a major life milestone. You’ll start getting income from the government to support you in retirement. But the choice you make about when to file for benefits will affect exactly how much money they end up providing.
Since the decision is so important, be sure you can answer these three crucial questions before claiming.
1. What will your monthly Social Security benefit be?
Before claiming Social Security, it’s important you have a realistic idea of how much you’ll receive.
These retirement benefits are intended only to replace about 40% of pre-retirement income. Sadly, many people are not aware of the fact that their benefit will be pretty low relative to what they were earning before leaving work.
You need to replace a minimum of around 70% to 80% of what you were earning before retiring, so you must have a plan to supplement Social Security. Unless you know how big your benefit check will be, it’s impossible to determine if you’ll have enough extra money coming in.
2. When are you claiming relative to your full retirement age?
You also need to know what your full retirement age is before you claim benefits so you can understand how filing at your current age will affect the size of your monthly checks.
Every retiree has a standard benefit based on average earnings over 35 years. This standard benefit is the amount you get if you claim right at full retirement age. But you may not want to claim at that time, which is between 66 and four months and 67 for anyone who was born in 1956 or after.
If you are starting to receive checks before your full retirement age, you will permanently shrink your payments. The reduction in your standard benefit equals 5/9 of 1% per month for each of the first 36 months and 5/12 of 1% for any month before that. This means for each of the first three years you get benefits ahead of FRA, benefits will shrink by 6.7% annually. And if you claim more than three years early, you’ll see an additional 5% annual reduction off your standard benefit.
If you don’t claim early but instead claim late, the opposite happens — you permanently increase benefits by 2/3 of 1% per month. This adds up to an 8% annual bump up, but you only get to increase benefits until 70.
You’ll want to be sure you understand how your age at the time of filing relative to your FRA will either grow or shrink your monthly Social Security income.
3. How will your claim affect your ability to earn extra income?
Finally, if you are hoping to work while getting Social Security benefits, it’s crucial to understand the rules.
Retirees who have already reached full retirement age are allowed to work as much as they want, so this isn’t a concern if you’ve met that milestone. But if you are under your FRA when you claim Social Security, you can lose some of your benefits.
Specifically, if you earn above $19,560, you lose $1 in Social Security benefits for each $2 above that limit. This rule applies if you won’t reach FRA at all during the year. If you will reach FRA at some point in the year but haven’t yet, you lose $1 for each $3 earned above $51,960.
The loss of benefits is temporary. At full retirement age, payments are recalculated and your monthly check gets a little bit higher for each month you forfeited payments due to working too much. But in the interim, you can’t double dip — so if you were planning to supplement Social Security with a paycheck, that can be a problem.
By making sure you can answer these questions, you can make the best choices about when to claim your retirement checks, and you hopefully won’t end up making a decision you regret.