3 Ways You Can Lose Your Social Security Benefits
Millions of seniors today regard Social Security as a critical source of income. But if you're not careful, you could wind up losing out on some of that money and struggling during retirement as a result. Here are a few ways your benefits might shrink.
1. Not knowing your full retirement age
Your Social Security benefits are calculated by taking your 35 highest-paid years of wages, adjusting them for inflation, and then applying a special formula to arrive at the amount of money you're entitled to collect each month during retirement. But you can only claim your full monthly benefit once you reach full retirement age, or FRA. Here's what FRA looks like, depending on when you were born:
|Year of Birth||Full Retirement Age|
|1955||66 and 2 months|
|1956||66 and 4 months|
|1957||66 and 6 months|
|1958||66 and 8 months|
|1959||66 and 10 months|
|1960 or after||67|
DATA SOURCE: SOCIAL SECURITY ADMINISTRATION.
Now, you are allowed to file for benefits beginning at age 62, but as you can see, that's well before FRA. And for each month you claim benefits ahead of FRA, they get reduced on a permanent basis. The maximum reduction in benefits you might face is 30%, which applies if you claim Social Security at 62 with an FRA of 67, but filing even a year early will reduce your benefits by 6.67%.
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As such, it's important that you know when you're entitled to your benefits in full. Yet in a recent Fidelity survey, only 26% of Americans could correctly pinpoint their FRA so if you don't know that number, consult the table above and be sure to remember it.
2. Not checking your earnings statements for errors
Each year, the Social Security Administration (SSA) issues you an earnings statement summarizing your taxable wages for the year, as well as estimating your retirement benefits. If you're 60 or older, you'll get that statement in the mail. If you're younger than 60, you'll need to create an account on the SSA's website and access it there.
If you don't review your earnings statement each year, you risk losing out on money down the line. That's because it's not unheard of for an earnings statement to contain an error that works against you, like missing income, and since your retirement benefits are earnings-based, failing to correct mistakes could hurt you when you're older.
For example, your earnings statement might list your annual income one year as $54,000 when it was really $72,000. Does that happen all the time? No. But it can happen, so stay vigilant.
3. Delaying benefits too long
Just as claiming benefits ahead of FRA will cause them to shrink, delaying benefits past FRA will cause them to increase. For each year you hold off filing beyond FRA, you accrue credits that boost your benefits by 8% a year. This incentive, however, expires once you turn 70, which means there's no sense in delaying your filing past that point. And if you wait too long to claim benefits, you'll risk losing out on money that could've otherwise been yours.
Now one thing you should know is that the SSA will pay you up to six months of retroactive benefits, so if you file at 70 1/2, you won't lose out on money by waiting those extra six months. But if you file past then, you'll effectively give up income for no good reason. As such, you really shouldn't wait past your 70th birthday to sign up for Social Security.
Chances are, you'll rely on Social Security to some degree in retirement. Avoid the mistakes we've discussed here so your benefits don't take a needless hit.
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