The Simple Social Security Rule That Could Cost You Thousands

With most Americans no longer getting a guaranteed pension and many struggling to save enough for retirement, Social Security has become one of the most critical income sources for seniors.

Unfortunately, despite the important role Social Security benefits play, many Americans don’t understand how they work. This is a problem because not knowing a key Social Security rule could cost you thousands of dollars — and make it much harder to have financial security in your later years.

Here’s the Social Security rule you need to know to avoid losing out.

This critical Social Security rule has a huge impact on your benefits

One of the single most important Social Security rules you need to know relates to the age at which you claim benefits.

Specifically, if you start your Social Security checks before your full retirement age, you will be subject to early filing penalties that result in a reduced benefit. This benefits reduction is permanent. Your benefits are not recalculated once you are hit with it, unless you make drastic moves to undo your early claim.

See, you get to claim your standard benefit if you start receiving Social Security income at exactly your FRA. Your standard benefit equals a percentage of inflation-adjusted average wages over your highest 35 earning years. But for anyone born in 1960 or later, the FRA is 67. And you can claim Social Security much earlier than that — as early as age 62.

The catch is that every month you claim ahead of your FRA, these early filing penalties will apply to reduce the standard benefit. Penalties equal 5/9 of 1% for each of the first three years you’re getting payments ahead of your FRA, and 5/12 of 1% before that.

How much does an early claim cost you?

Looking at the monthly penalties, they may not seem too drastic — but they add up dramatically. If you claim Social Security at 62 when your FRA is 67, you will face a 30% reduction in your monthly payment.

And remember, that 30% cut is forever. It follows you throughout your retirement, and future Social Security cost-of-living adjustments are smaller on a dollar-for-dollar basis because they equal a percentage of your benefit.

If you had been on track for a $2,000 standard benefit and took the full 30% hit due to claiming at 62, this would reduce that amount down to just $1,400, giving you $600 less per month to spend.

Of course, it is true you’ll get benefits years earlier, but research has shown that most people do better than breaking even when they delay and pass up a few years’ worth of benefits. Around 90% end up with more lifetime Social Security income by waiting to claim checks until after FRA to both avoid early-filing penalties and claim delayed retirement credits.

So you need to understand the Social Security rules for early filing penalties before you claim benefits, because otherwise you could end up with a much smaller check and a lot of regret.