Four mistakes that can lower your Social Security payment: “don’t take your benefits too early”
Saving up for retirement isn’t something you should leave until the last minute as you’ll need to put more and more of your income away the longer you wait to begin. Using the power of time, smaller amounts tucked away now will add up to big dollar amounts in the future. But there is one retirement savings plan that all Americans typically have access to, Social Security.
Americans have a portion of every pay check deducted to pay Social Security taxes which earn them credits. Once they’ve reached 40, you can only earn 4 per year, they will qualify for retirement benefits from the Social Security Administration once they’ve reached retirement age.
While only a little more than a third of non-retirees think that this will be a major source of income, among current retirees 58% say that it is according to a Gallup report last year.
Four mistakes that can lower your Social Security payment
The SSA bases the Social Security entitlement on data gathered throughout your working life, which is formed into an earnings record. This information is then used, with a three-part process, to calculate the size of payments. However, there are things you should keep in mind so that you can maximize the amount that you get each month when you retire.
Poor earnings during your working years
The SSA uses for its calculations your 35 highest-earning years throughout your working life to calculate your Average Indexed Monthly Earnings (AIME). While it may be out of your control, or you are comfortable earning less than you perhaps could to enjoy a better quality of life, this may result in lower Social Security benefit payments come retirement.
Working less than 35 years will reduce you Social Security payments
Additionally, if you have less than 35 years of earnings that contributed to Social Security, those years will be calculated as $0 earning years, thus reducing your overall average and in turn your potential monthly entitlement. So, you’ll want to think what that sabbatical year could mean years down the road when you sign up for Social Security benefits.
Don’t take your benefits too early
You can begin collecting Social Security retirement benefits the month after you turn age 62. However, doing so could cost you nearly a third of your potential benefit you would be entitled to if you waited until you reach full retirement age, or Normal Retirement Age in SSA lingo. So if you can, you don’t take your benefits too early.
Americans born in 1960 and later will have to keep contributing to Social Security until they are 67 years old, if they want to receive the full benefit that they have earned. The Social Security Administration has a calculation for just how much your monthly Social Security payments will be permanently reduced from the primary insurance amount accumulated over the years you contributed depending on just how early you retire.
On the contrary, if you keep working until you are 70 before claiming benefits, you will receive 8% more per year that you work beyond full retirement age.
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Working while collecting Social Security may cost you
“If you are younger than full retirement age and earn more than the yearly earnings limit, we may reduce your benefit amount,” warns the SSA. “If you are under full retirement age for the entire year, we deduct $1 from your benefit payments for every $2 you earn above the annual limit. For 2025, that limit is $23,400.”
The limit greatly increases for those who are over the full retirement age, currently set for 2025 at $62,160. For every $3 dollars you earn over that limit the SSA deducts $1 in benefits.
“We only count your earnings up to the month before you reach your full retirement age, not your earnings for the entire year,” states the SSA.
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