Thousands of US beneficiaries lose 30% of Social Security benefits due to a single decision. Don't make this costly mistake

For U.S. workers, Social Security may be an afterthought as they plan their retirement. With the focus on monthly expenses, savings, investment returns and inflation, it’s easy to lose sight of one critical aspect: the timing of your claim.

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When you file your claim could be just as important, if not more, than all the income and payroll contributions you made during your career. Getting it wrong can cost you a whopping 30% in monthly benefits.

Yet, millions of Americans drive right into this obvious pitfall in their 60s. Here’s why this can be a big mistake and why many Americans make it anyway.

Losing a third of your benefits

For most people, the earliest age of Social Security eligibility is 62 (1). However, this doesn’t correspond with the Social Security Administration’s (SSA’s) so-called Full Retirement Age or FRA.

The FRA, for anyone born after 1960, is age 67. As the name suggests, this is the age you can receive the full 100% of your benefits. So if your lifetime earnings imply you’re eligible for $2,000 a month in benefits, you need to wait until the age of 67 to receive this.

Claiming earlier reduces the amount you receive every month. The reduction, according to the SSA, can range from as little as 3.3% if you claim six months before FRA all the way up to 30% if you claim at earliest eligibility (age 62) (2).

So if you were on track for $2,000 monthly payouts at age 67, claiming at 62 could slash that down to just $1,400. A full $600 less per month. Spread out over the course of a 30-year retirement this monthly cut to your income. For many retirees, that’s the difference between a comfortable lifestyle and an uncomfortable lifelong struggle.

On the flip side: Delaying beyond FRA can earn you Delayed Retirement Credits. These added credits permanently boost your monthly payouts. Seniors can expect a 8% bump for every year they manage to delay their claim beyond FRA. By the age of 70, this can boost monthly payouts by a whopping 24% (3).

So, someone eligible for $2,000 in monthly benefits at FRA could boost that check to $2,480 by waiting just a few more years. An additional $480 per month, stretched out over a 30-year retirement, is an aggregate boost of at least $172,800.

The math is clear: this single decision can have a big impact on your retirement.

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Many make the mistake anyway

Unfortunately, despite the clear math, millions of Americans still choose to file their Social Security claim early. According to the Bipartisan Policy Center, nearly 29% of retirees filed their claim at age 62 (2). A whopping 61% started taking their benefits before FRA.

Simply put, the majority of Social Security beneficiaries opt for a benefit cut instead of waiting.

Part of this could be because the Social Security system is complicated and many workers fail to understand it. A lack of information or professional advice could push many into making this costly mistake without understanding the consequences.

However, there could also be some practical realities pushing seniors into early claims. These include financial hardship, unexpected financial emergencies, sudden layoffs, or a physical ailment that makes working impossible.

Some seniors want to delay their claim but can’t afford to do so and in these cases, an early claim reflects necessity rather than ignorance.

Complicating matters is that the Old-Age and Survivors Insurance (OASI) Trust Fund — the program that pays retiree and survivor benefits — will run out of money in 2032 (4). So some may be feeling pressure to take their benefits now and avoid a potential cut to payments later.

And of course, each person has their own unique health needs to consider, impacting their health-adjusted life expectancy — an important factor to any financial plan.

What can you do?

Understanding the mechanism of the Social Security system could be a good idea and enable you to plan ahead.

Bear in mind that the system is constantly evolving and lawmakers can make changes at any time, so stay up to date with how every move by Congress impacts you and your retirement plan.

If you find yourself retiring earlier than you anticipated, you could consider seeking freelance or part-time employment to help you bridge the income so you can delay your claim. Also consider temporary lifestyle adjustments and a tighter budget for the years between your retirement and benefits claim.

Some of these targeted moves can materially raise your lifetime income from Social Security.

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Article sources

We rely only on vetted sources and credible third-party reporting. For details, see our editorial ethics and guidelines..*)

Social Security Administration (1), (2); Bipartisan Policy Center (3); Congressional Budget Office (4)

This article provides information only and should not be construed as advice. It is provided without warranty of any kind.