This Social Security Mistake Could Cost You $456 a Month in Retirement

Imagine your boss marches over to your desk and informs you that your paychecks will go down by over $450 a month for as long as you're employed. You'd probably get stressed out and annoyed.

It turns out that you may be in line for that sort of pay cut as a senior if you file for Social Security at the wrong time.

Can you afford a major hit to your Social Security benefits?

Your Social Security benefits are calculated based on your average monthly wage, adjusted for inflation, during your 35 highest-paid years in the workforce. From there, you can claim your full monthly benefit once you reach full retirement age, or FRA.

Older person at a table massaging their forehead.

Image source: Getty Images.

FRA is based on your year of birth. If you were born in 1960 or later, you're looking at an FRA of 67, but you're allowed to file for Social Security as early as age 62.

The upside of claiming benefits at 62 is clear: You get your money as soon as possible without risking that you'll get less from Social Security in your lifetime if you pass away at a relatively young age. Yet the downside of filing at 62 is pretty severe. You'll reduce your monthly benefit by 30% with an FRA of 67, and that reduction will remain in effect for the rest of your life.

The average senior on Social Security today collects a monthly benefit of $1,519. If we reduce that benefit by 30%, we end up with $1,063. If you file at 62 instead of waiting until 67, you could wind up with $456 less income on a monthly basis, or $5,472 less on a yearly basis. That's a hit you probably can't afford to take, especially if you're nearing your senior years with little money in your 401(k) or IRA.

What would a $456 monthly pay cut mean for your retirement?

Losing out on $456 a month could constitute a major hit to your finances. The result? You might need to downsize your living space, relocate somewhere with a more affordable cost of living, or reduce entertainment expenses.

If a $456 pay cut would devastate you at present, it will really hurt you during retirement. Don't let that happen. Instead, wait until at least FRA to sign up for Social Security, unless there's a truly compelling reason to claim benefits sooner (for example, if you've lost your job and really can't swing your bills without taking benefits).

An even better bet may be to delay your benefits past FRA. For each year you wait, you'll boost your reward by 8%. Instead of suffering a pay cut, you'll instead orchestrate your very own pay raise when you need it most.

The $16,728 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.

The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Latest Markets Videos

    The Motley Fool

    Founded in 1993 in Alexandria, VA., by brothers David and Tom Gardner, The Motley Fool is a multimedia financial-services company dedicated to building the world's greatest investment community. Reaching millions of people each month through its website, books, newspaper column, radio show, television appearances, and subscription newsletter services, The Motley Fool champions shareholder values and advocates tirelessly for the individual investor. The company's name was taken from Shakespeare, whose wise fools both instructed and amused, and could speak the truth to the king -- without getting their heads lopped off.

    Learn More