Many factors come into play in determining how much retirement income retirees receive from social security. However, the age at which you first start receiving payments is one of the most important decisions you will make and which will affect the size of your checks.
Unfortunately, nearly half of all Americans are at risk of making this choice without really understanding the implications. This is according to a new Nationwide survey which revealed that millions of people harbor a dangerous belief in how their timeline for claiming benefits will affect their monthly income.
Americans are making a fundamental – and costly – mistake about social security
According to the nationwide survey, approximately 45% of Americans believe either Social benefits will automatically go up when they are reached full retirement age (OFF) or they are not sure whether the benefits will increase at that point.
Here’s how things actually work.
Retirees are given the opportunity to start their benefit checks when they are as young as 62, but each senior has an FRA based on the year they were born. This full retirement age can be as early as 66 and four months for those turning 66 this year. But it can also be as late as 67 years for anyone born in 1960 or later.
Any senior who starts their check before their own stated full retirement age will be affected early filing of fines. These result in a reduction in the standard benefit that every senior must have on FRA. The exact effect of early submission of penalties depends on how quickly before FRA someone starts their checks, but a claim of 62 can lead to as much as a 30% reduction in monthly income.
Now this is where the big misunderstanding comes in. Nearly half of all workers believe that if they are affected by their benefits as a result of an early claim, their reduced benefit will not be permanent. The nationwide survey reveals that 45% of people believe that when they hit their FRA, Social Security will bump up their check again. And that’s simply not going to happen.
Here’s why this social security flaw can be so damaging
Assuming that the reduction in benefits due to early submission is temporary can be a big mistake for seniors who may find themselves with far less pension money than they had expected.
Let’s say you were entitled to a standard benefit of $ 1,600 at full retirement age, but you apply for benefits ahead of schedule and start them at 62, even if your FRA is first 67. The 30% reduction in benefits due to penalties for Early filing would bring your monthly income down to just $ 1,120 and you would miss out on $ 480 a month, or $ 5,760 a year.
Assuming you just give up this money until age 67, you may not worry too much about the “temporary” drop in income – especially since you will benefit from getting money in right away. But once you realize that you want to reduce your benefits too lifethat’s another story.
If you live to the age of 85, a reduction in your benefits of $ 5,760 per year would mean that you give up about $ 103,680 in income you could have received from age 67 to 85 if you had just waited to claim benefits. That’s a big part of the change.
Of course, you would have received benefits for five additional years if you started your checks at 62 instead of 67. But five years of pension benefits equivalent to $ 1,120 yield only $ 67,200. You would end up with $ 36,480 less over the course of your life than if you had delayed your claim and received your full benefit from age 67 to 85 instead of accepting a reduced benefit for life.
Now there may be times when starting benefits at 62 make sense – especially if you are in poor health and probably do not want to live very long. But you want to make a fully informed choice as to whether this decision is the right one for you.
You does not want to start your checks ASAP under the assumption that the limit for your benefits is temporary, only to later find out that your monthly social security checks will be less than they could have been for your entire retirement year.
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