In 2022, the National Bureau of Economic Research (NBER) shared a surprising study titled: “How Much Lifetime Social Security Benefits Are Americans Leaving on the Table?” The study revealed that most workers are not maximizing their Social Security benefits.
According to the research, over 90% of workers aged 45 to 62 could get the best lifetime income by claiming Social Security at age 70. However, only a small number wait that long, leaving a median loss of over $225,000 in lifetime benefits.
This article explains two key Social Security rules that are often overlooked. By understanding them, you could raise your monthly benefits by up to 77%.
How Social Security Benefits Are Calculated?
A survey by the Nationwide Retirement Institute found that more than half of adults don’t fully understand how to maximize their Social Security benefits.
This lack of knowledge can result in losing thousands—or even hundreds of thousands—of dollars over a lifetime.
The NBER study estimates that the average worker aged 45 to 62 could lose about 10% of their lifetime spending power if they don’t make the best use of their Social Security income.
Social Security benefits are based on two main factors: your lifetime earnings and your claiming age. Here’s how it works:
- Primary Insurance Amount (PIA): Your PIA is calculated using your inflation-adjusted lifetime earnings. It represents the monthly benefit you would get if you claimed Social Security at your full retirement age (FRA), which is 67 for people born in 1960 or later.
- Adjustments for Claiming Age: Claiming earlier than your FRA lowers your monthly benefits, while claiming later increases them. Retirement benefits can start as early as age 62, but delaying your claim past FRA can significantly boost your monthly income.
The 2 Rules That Could Increase Your Benefits by 77%
Claiming Social Security at the right time is crucial. Two overlooked rules explain how the timing of your claim affects your benefits:
Rule 1: Reductions for Claiming Early
If you start collecting Social Security before your FRA, your benefits are reduced. The reduction is calculated as follows:
- First 36 months before FRA: Benefits are reduced by about 0.55% per month (five-ninths of a percentage point).
- Each additional month beyond 36 months: Benefits are reduced by about 0.42% per month (five-twelfths of a percentage point).
For example, if you claim at age 62 (five years before your FRA), your benefits will be reduced by 30%.
Rule 2: Increases for Delayed Claims
If you delay claiming Social Security past your FRA, your benefits increase. The increase is calculated as follows:
- Each month after FRA: Benefits grow by about 0.67% (two-thirds of a percentage point).
- Maximum delay: Delayed retirement credits stop accumulating at age 70, so claiming later than that doesn’t add any extra benefit.
A Hypothetical Scenario
Let’s break this down with an example. Imagine a worker with a PIA of $2,042 (the average in 2022):
- Claiming at Age 62: If they start Social Security early, their benefits are reduced by 30%, giving them $1,429 per month.
- Claiming at Age 70: If they delay their claim, their benefits increase by 24%, resulting in $2,532 per month.
By waiting until age 70, the worker gets a 77% higher benefit compared to starting at age 62. That’s $2,532 divided by $1,429.
Why Timing Matters?
Most retirees claim Social Security before age 70, often because they don’t fully understand these rules or feel they can’t afford to wait. However, understanding the long-term impact of timing could help you make a more informed decision.
Waiting until age 70 to claim Social Security may not be the right choice for everyone, but knowing the potential benefits allows you to make a choice that aligns with your financial goals.
The dollar amounts may differ depending on your situation, but the percentage changes remain the same. By applying these rules, you could potentially boost your Social Security income and improve your financial stability in retirement.
Final Thoughts
Understanding these two Social Security rules can make a big difference in your retirement income. By planning when to claim, you can ensure that you get the most out of the benefits you’ve earned.
Whether you choose to claim early, at your FRA, or delay until age 70, being informed empowers you to make the best decision for your financial future.
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Archer Bannister is a journalist with 4 years of experience covering hard-hitting stories. Currently working with Mikeandjonpodcast, Archer specializes in delivering timely and in-depth updates on a variety of topics, including crime news, politics, and national issues affecting the USA. His expertise and dedication to delivering accurate, impactful news make him a trusted voice for audiences seeking to stay informed on critical topics.
