Social Security provides income to 90% of retirees in America, yet many don't know exactly how this program works . Confusion is definitely understandable, as a quick search of "how do Social Security benefits work?" turns up more than 72 million results.
While figuring out Social Security claiming strategies can be complicated, there's one really important mistake almost 4 in 10 preretirees are making that could end up costing a fortune. That mistake: Not understanding the impact retiring before full retirement age has on benefits. How are so many getting this question so wrong?
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Retirees don't understand this key fact about Social Security benefits
According to a 2017 Fidelity Social Security survey, 39% of Social Security beneficiaries believe it's possible to retire early, claim a reduced Social Security benefit, and have benefits increase automatically once they reach full retirement age (FRA). This is simply not true.
It's true you can claim benefits before FRA. You can claim benefits as early as 62, although benefits are reduced if you claim early. But this reduction in benefits is permanent.
Your reduction in benefits will last for life -- and all future cost-of-living adjustments will be based on your lower benefit amount -- unless you take steps to undo your early claim.
How much are your benefits reduced?
The reduction in benefits can be significant if you claim benefits early, while delaying past FRA allows you to increase your benefits up until age 70.
Benefits are reduced by 5/9 of 1% for each month you claim benefits before FRA. If you claim benefits more than 36 months early, benefits are reduced by an additional 5/12 of one percent. If you delay past FRA, benefits are increased by 2/3 of 1% for each month.
This chart shows how the reduction or increase would affect you if your benefits at FRA would be $1,404, the average monthly benefit for retirees collecting Social Security in 2018.
| Age | Change in Benefits Compared to FRA | Monthly Benefits | Annual Difference in Benefits vs. FRA |
|---|---|---|---|
| 62 | 30% reduction | $983 | ($5,052) |
| 63 | 25% reduction | $1,053 | ($4,212) |
| 64 | 20% reduction | $1,124 | ($3,360) |
| 65 | 13.3% reduction | $1,218 | ($2,232) |
| 66 | 6.7% reduction | $1,310 | ($1,128) |
| 67 | No change | $1,404 | $0 |
| 68 | 8% increase | $1,516 | $1,344 |
| 69 | 16% increase | $1,628 | $2,688 |
| 70 | 24% increase | $1,740 | $4,032 |
Data source: Social Security Administration.
By claiming early, you do get extra years of benefits, so this needs to be considered when deciding when to claim benefits. There's a simple calculation to determine how much time it will take to break even for delaying benefits: multiply the lower annual benefit by the extra years of benefits and divide this number by the difference between the higher and lower benefits.