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Making This Social Security Choice in 2022 Could Cut Your Benefits by 30%

The Motley Fool
The Motley Fool
 2022-01-16

Retirees have a lot of control over how much Social Security income they end up with. In fact, decisions seniors make about when to get their first check could cause their income to rise or fall dramatically.

Older Americans need to be aware of the impact their claiming choice could have on their monthly benefit so they don't end up regretting it. In particular, it's important to know that if you make this decision in 2022, your benefits could shrink by as much as 30%.

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Will you end up slashing your monthly Social Security benefit?

If you decide to start your Social Security checks in 2022 , your decision could reduce your benefits by as much as 30%, depending on your age.

Why would simply starting benefits reduce your check by so much? It's simple. If you don't wait until your full retirement age (FRA) , you'll be subject to penalties that lower the amount of your standard benefit.

Retirees who are turning 62 in 2022 have a full retirement age of 67. That means if they want their standard benefit, they must wait five years before they get their first Social Security check -- even though they are eligible to claim it as soon as they've reached their 62nd birthday.

At 67, they'd get a benefit equaling a percentage of average wages in the 35 years when their earnings were highest. But at 62, that benefit would be reduced by 30% because they'd be hit with the maximum possible early-filing penalties.

Those who are older than 62 but younger than their full retirement age in 2022 would also suffer a loss in their benefits if they file for them this year, although it wouldn't be quite 30%.

What are early-filing penalties and why do they reduce your benefit so much?

Early-filing penalties clearly have financial consequences since they can leave some retirees with Social Security checks that are 30% smaller than the benefits they earned based on their work history. But what exactly are these penalties?

To understand, it's helpful to know that Social Security gives retirees a choice of when to claim benefits, allowing them to start their checks any time between ages 62 and 70. Of course, it wouldn't make sense for anyone to wait until 70 if they got the same benefits they would've received at 62. They'd be giving up years of income for no reason.

To make things fair for everyone while providing flexibility in when people retire, Social Security was designed with a system of early-filing penalties applicable before full retirement age. Because of these penalties, those who claim benefits at a younger age would get more checks but each would be smaller. Those who wait beyond FRA are also rewarded under the benefits formula with delayed retirement credits that raise their benefits.

Actuaries predict life expectancies, which were used to determine how big those penalties and credits should be so early claimers and late filers would theoretically get the same lifetime benefits whether they started at 62, 70, or any age in between. With this information about projected life expectancies, the Social Security devised a system in which:

  • Early filers see checks reduced by 5/9 of 1% for each of the first 36 months they've claimed benefits ahead of FRA and by 5/12 of 1% for any prior month they get benefits.
  • Late filers see checks increased by 2/3 of 1% for each month after FRA they claim until 70.

Full retirement age has changed over time, but this system of early-filing penalties hasn't.

As mentioned above, anyone turning 62 this year will have a FRA of 67. So they'd be subject to the maximum early-filing penalties if they start their checks in 2022. With five years of early-filing penalties, they'd lose 30% of their standard benefit plus the chance to earn delayed retirement credits. And anyone who claims benefits before reaching 66 and four months this year will be subject to at least some early-filing penalties, as they'll also be starting their checks before FRA.

If this applies to you, it's important to know how much filing for benefits this year could shrink your monthly checks. Even if it's not the full 30%, a reduction can still be painful if you'll rely on Social Security as an important income source in your later years.

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