Photo credit: www.fool.com
If you’re looking to maximize your Social Security benefits, there are certain actions you should steer clear of to avoid reducing your monthly payments.
For many seniors, Social Security serves as a vital source of income during retirement. Understanding the implications of your choices is crucial, as some decisions can significantly impact the amount of money that flows into your bank account each month as a retiree.
1. Claiming Benefits Before Age 70
One of the surest ways to decrease your monthly Social Security check is to claim your benefits before reaching age 70. Although you are permitted to begin receiving benefits as early as 62, doing so results in a considerably lower payment.
Your full retirement age (FRA) is determined by your birth year; for example, it is 66 years and 10 months for those born in 1959, and 67 for individuals born in 1960 or later. Claiming benefits at your FRA grants you a standard benefit amount calculated based on your lifetime earnings. However, if you file for benefits early, you incur a penalty for each month you claim before your FRA. This penalty may seem minimal at first—5/9 of 1% for the first 36 months and 5/12 of 1% for any months prior—but it compounds rapidly. For instance, if you claim benefits at 62 instead of 67, your monthly payment could be reduced by approximately 30%. Even claiming just a year early could lead to a reduction of around 6.7%.
Conversely, delaying your claim enhances your future payments. For each month you wait beyond your FRA to start receiving benefits, you earn a delayed retirement credit, increasing your checks by 2/3 of 1%. However, these credits cease to accumulate after age 70, which means that if you wait until then to claim, you’ll secure the maximum monthly payment—potentially 24% more than your standard benefit.
While maximizing your monthly benefits is desirable, it’s essential to note that this strategy does not guarantee the highest lifetime benefits unless you live long enough to recoup the missed payments. Nonetheless, many retirees find it advantageous to wait, and delaying can also increase survivor benefits for a spouse if you were the primary earner.
2. Retiring with Less Than a 35-Year Work History
Another factor that can reduce your Social Security benefits is not having a complete 35-year work history. The standard benefit you receive at your FRA is based on your average earnings over your 35 highest-earning years.
This calculation adjusts your wages for inflation, and you receive a monthly payment based on a percentage of your average monthly earnings during that time period. If you do not work for 35 years, the years you do not work will be factored in as $0 wages, ultimately lowering your average. For example, if you stop working after 20 years, your calculation will include 15 years of $0 wages, leading to a substantially diminished average monthly earning.
Many retirees discover benefits from working beyond 35 years, particularly if their income has increased over time. By doing so, they can replace lower-paying years with higher earnings, enhancing their benefit calculation. To maximize your Social Security checks, it’s best to avoid allowing years of $0 wages to factor into your benefit calculation.
3. Earning Too Much Before Reaching FRA
Lastly, if you claim Social Security benefits before reaching your FRA and continue to work, be cautious, as this can result in reduced monthly payments or potentially eliminate them altogether. Earnings exceeding $23,400 in a year will diminish your benefits by $1 for every $2 over that amount if you are below your FRA during the working year. Once you reach FRA, that limit increases to $62,160, and benefits are reduced by $1 for every $3 over that threshold.
It can be disheartening to see your benefits decrease due to additional income, especially if you were relying on both Social Security and employment income. However, the upside is that your monthly benefits will be recalculated upon reaching FRA to account for any months of reduced or missed payments, leading to an eventual increase in your benefits. After you reach FRA, you can work without any loss of benefits, making it essential to plan accordingly if you’re considering working while on Social Security.
In summary, if you engage in any of these three actions, it will result in a diminished monthly payment. While there may be valid reasons to make these choices, it’s critical to weigh the potential consequences carefully before proceeding.
Source
www.fool.com