If I Could Tell All Retirees 1 Thing About Social Security, I'd Say to Do This Before You Claim Benefits

Key Points

• Know that the full Social Security retirement age for someone born in 1960 or later is 67.

• Your benefits will be reduced or increased based on whether you claim before or after that point.

• Earning over a certain amount while claiming Social Security early can temporarily reduce your benefit.

• The $23,760 Social Security bonus most retirees completely overlook ›

There are many different working parts to the Social Security program. Some people, including me, would argue that there are too many working parts. Regardless, one thing most people should be able to agree on is that Social Security is one of America's most-needed and beneficial social programs.

To better understand Social Security, it helps to cut out some of the fluff and focus on the details that matter most. If I could tell retirees one thing about Social Security before claiming benefits, it would be to understand just how important your full retirement age (FRA) is and how much of Social Security revolves around it.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

Image source: Getty Images.

Your monthly benefit is affected by when you claim relative to your full retirement age

The most important thing that revolves around your FRA is your monthly benefit based on when you claim relative to your FRA. By claiming benefits at your FRA, you'll receive your primary insurance amount (PIA), which is your base benefit. From there, benefits are adjusted based on whether you claim before or after your FRA.

By claiming before your FRA, your monthly benefit is permanently reduced. Each month you claim early reduces your benefit by 5/9 of 1% monthly for the first 36 months. Each additional month after 36 will further reduce your benefits by 5/12 of 1%.

For example, if your FRA is 67 and you claim benefits at 64, your benefit will be reduced by 20%. If your PIA was $2,000, you'd only receive $1,600. If you claim at 62, your benefit will be reduced by 30%, bringing it down to $1,400.

If you delay benefits past your FRA, they'll be increased by 2/3 of 1% monthly (called "delayed retirement credits"), which works out to 8% annually. This will occur until you turn 70, at which point benefits are no longer increased. Continuing our example of a PIA of $2,000, delaying benefits until 70 would increase them by 24%, bringing the amount to $2,480.

Image source: The Motley Fool.

Claiming spousal benefits before your full retirement age also affects your benefit

It's not just standard benefits that are affected by when you claim relative to your FRA; it's also spousal benefits. The difference is just how much the benefits are affected.

Claiming spousal benefits early reduces your monthly amount by 25/36 of 1%, up to 36 months. Each additional month further reduces benefits by 5/12 of 1%. For someone whose FRA is 67, this works out to a 25% and 35% reduction by claiming at 64 and 62, respectively.

A major difference between standard and spousal benefits is that spousal benefits don't receive delayed retirement credits if you claim after your FRA. This is an important distinction for married couples to keep in mind.

Your full retirement age dictates how much you can earn while claiming benefits early

There's nothing wrong with claiming Social Security and continuing to work and earn money. However, if you claim benefits before your FRA, you'll need to monitor how much you make, or you'll be subjected to Social Security's retirement earnings test (RET). The RET will reduce your monthly benefit, depending on how much you earn over the limit.

If you won't reach your FRA in 2025, the earnings limit is $23,400. Earning more than that will reduce your annual benefits by $1 for every $2 earned over. For example, if you earn $12,000 over the limit, your annual benefit will be reduced by $6,000, or $500 monthly.

If you reach your FRA this year, the limit is $62,160. Earning more than that will reduce benefits by $1 for every $3 over. If you were to earn $12,000 over the limit, your annual benefit will be reduced by $4,000, or around $333.33 monthly.

One bright side is that benefits aren't permanently lost. Once you hit your FRA, Social Security will recalculate your benefits in a way that gradually adds the reduced amounts back.

The $23,760 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.

One easy trick could pay you as much as $23,760 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. Join Stock Advisor to learn more about these strategies.

View the "Social Security secrets" »

The Motley Fool has a disclosure policy.