October 24, 2017
The Roads to Smaller Social Security Checks, Part 1
If you need a GPS to figure out the best path for claiming Social Security, you’re not alone. The Government Accountability Office’s (GAO) September 2016 review suggests that many individuals do not grasp key details of Social Security rules that can affect their retirement benefits — including ones that can reduce them.
In this two-part series, I’ll review seven circumstances that could lead to lower benefits, and some potential ways to avoid them when possible.
Misunderstanding in Many Directions
Some people understand that delayed claiming leads to higher monthly benefits. However, many are unclear about the actual amount it increases when you claim at each age. The GAO also discovered widespread misunderstanding about the availability of spousal benefits, how monthly benefits are determined and how the retirement earnings test works. Below are the first factors I’ll cover that could permanently reduce your Social Security benefits.
Paths That May Lead to “Reduction Junction”
You may know that filing prior to your full retirement age (FRA) will permanently reduce your retirement benefit. However, there are several other factors that could potentially shrink your Social Security payment. Here are the first four:
1. Filing Early
If you were born between 1943 and 1954, the FRA for Social Security is age 66. Collecting at 62 leads to a lifetime 25 percent reduction of the primary insurance amount. Reductions are based on the number of months until you attain FRA:
If you were born after 1954, your full retirement age may be later. See the Social Security Adminstration’s website for the most recent breakdowns by birth year.
2. Claiming Lump Sums
Some retirees can claim up to a six-month lump sum benefit if filing after they reach FRA. Getting that first, large check may sound great, but the initial start date will be set at six months prior. That establishes a smaller monthly benefit moving forward. Before you choose this option, consider the impacts.
3. Earning and Claiming Social Security
Continuing to work and collecting Social Security may reduce your benefit if you earn over a certain amount. Here’s how this looks in 2017:
4. Working for an Employer That Doesn’t Pay
If you work for an organization that is not required to withhold Social Security taxes from your salary, such as a government agency or an employer in another country, the pension you get based on that work may reduce your Social Security benefits if one of the following affects you.
Watch for Smaller Social Security Checks, Part 2
In Part 2 of this series, I’ll review three other situations that could result in you receiving lower monthly Social Security benefits. Medicare choices, taxes on your benefits and owing debt in retirement can all have an impact. Understanding your options may help you make smarter decisions when it comes to filing your claim. Stay tuned.
The opinions expressed are those of Al Chingren and are no guarantee of the future performance of any American Century Investments portfolio.
This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.