Social Security is a crucial source of income for millions of seniors, which is why eligible recipients should take steps to maximize their benefits. Unfortunately, a large number of Americans lack the knowledge to make informed decisions about Social Security, and as such, end up losing out on large sums of money in their lifetime.
Now, given that Social Security has more than 2,700 distinct rules on the books, it's not surprising for beneficiaries to be clueless about the program to some extent. But what's troubling is that almost 75% of Americans are missing one key piece of information that could significantly impact the amount of money they collect as seniors: their full retirement age.
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In a 2017 Fidelity survey, only 26% of respondents could correctly identify their full retirement age for Social Security purposes. But without knowing that number, you're likely to make a huge mistake when it comes to filing for benefits.
Why your full retirement age matters
You may have heard that your Social Security benefits are based on how much you earned during your career, and that's true. Specifically, your 35 highest years of earnings on record are taken into account when calculating your full monthly benefit. That said, the age at which you first file for Social Security can cause that number to go up, go down, or stay the same -- which is why you need to know your full retirement age.
Your full retirement age is based on your year of birth, as follows:
Once you reach full retirement age, you're eligible to collect the full monthly benefit amount you're entitled to based on your earnings record. This means that if you're eligible for $1,600 a month in Social Security based on your work history, and you were born in 1961, you can collect that $1,600 in full provided you wait until age 67 to claim benefits. File sooner, and your monthly payments will end up being slashed.
How much of a hit might you take? It depends on how early you decide to file. You're allowed to start collecting Social Security as early as age 62. But because benefits are reduced by about 6.67% a year for the first three years you file early, and by 5% for each year thereafter, filing at 62 when your full retirement age is 67 would reduce your benefits by 30%. Using our example, that would take a monthly payment of $1,600 all the way down to $1,120.
There's a flip side as well. If you hold off on filing for Social Security past full retirement age, you'll get an 8% increase in payments for each year you wait, up until you reach 70. Either way, knowing your full retirement age is the first step to making the right decision based on your personal needs and circumstances.
Should you file at full retirement age?
Although waiting until full retirement age to take benefits guarantees that you won't face any sort of reduction on your full monthly benefit, filing at that point isn't necessarily your best move. If you're relying on Social Security to provide the bulk of your retirement income, then it often pays to wait on those benefits as long as possible (meaning, hold off until 70) to collect the highest monthly payout. On the other hand, if you wind up losing your job and find yourself desperate for money come age 62, it pays to start taking benefits early rather than rack up costly credit card debt to keep up with your living expenses.
Your health should be a factor in the decision to sign up for Social Security as well. Though the program is technically designed to pay you the same total lifetime amount regardless of when you first file, that formula assumes that you'll live an average lifespan. If your health is notably poor, then it generally pays to start taking benefits as early as possible, which means you don't actually want to wait until full retirement age. Conversely, if you have reason to believe you'll live to a later age than most (say, a family history of longevity), it often pays to hold off past full retirement age and start taking benefits at 70.
There are numerous scenarios to play with, but the point is that without knowing your full retirement age, you'll be ill-equipped to make the best decision. So memorize the above chart and know what you're dealing with as far as that age goes. It's the best way to ensure that you get the most out of the benefits you've earned.
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