3 Seemingly Harmless Social Security Moves That Could Cut Your Benefits

Optimizing your Social Security strategy is one of the easiest and most effective ways to make your retirement more comfortable. Benefits account for about one-third of the income of adults 65 and older, according to the Social Security Administration, so it’s wise to squeeze every penny out of the program.

However, Social Security can be complex and confusing at times. There are many factors that influence the amount of your benefit, and sometimes seemingly harmless decisions can reduce your payments by hundreds of dollars a month.

While you don’t need to know all the downsides of the program, these three situations could affect your benefits more than many people realize.

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1. Working after taking benefits

You don’t necessarily have to retire as soon as you start receiving benefits, and in some cases it may be smart to continue working at least part-time after you’ve claimed Social Security. But if you’re below full retirement age (FRA), your benefit could be reduced or withheld entirely depending on your earnings.

The Retirement Earnings Test is an income limit that will determine how much, if any, of your benefit will be withheld from work income. There are two limits for 2024, depending on whether or not you reach FRA this year:

Source: Social Security Administration. Table by author.

For example, let’s say you’re 65 with an FRA of 67 and you earn $25,000 a year working part-time. You won’t reach FRA in 2024, so your earnings are subject to the $22,320 annual limit. Since your income is $2,680 over the limit, your benefit will be reduced by $1,340 per year — or about $112 per month.

Although these cuts can be hard to bear, there is good news: they are not permanent. Once you reach your FRA, your benefit will be recalculated and you’ll start earning higher payments to account for the money that was withheld.

That said, it’s still wise to consider how your income will affect your benefit amount before you start claiming, if possible. If you start receiving benefits and then go back to work because you need the extra money, it may not help your finances if your payments are drastically reduced because of that income.

2. File early without knowing

The age at which you file for Social Security is one of the most important factors influencing the amount of your benefit. Claiming FRA will get you 100% of the benefit you are entitled to based on your work history, and filing before this age (as early as 62) will permanently reduce your payments.

To be clear, claiming early isn’t necessarily a bad move. In some cases, it might be the smartest option for making the most of your retirement. But many people may not realize how early they claim, which could cause problems for their finances.

According to a 2024 survey from the National Retirement Institute, the average US adult between the ages of 60 and 65 considers the FRA to be 64 years. However, the FRA for everyone is between the ages of 66 and 67.

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Let’s say, for example, that you are heading toward retirement with the plan to file with the FRA and that you expect to collect that full benefit amount. Let’s also say you mistakenly think your FRA is 64 years old, when it’s actually 67 years old. You may expect to collect 100% of your benefit at age 64, when in reality your payments will be reduced by 20% because you file. three years earlier.

Again, asserting early can sometimes be wise. But if you don’t realize you’re filing early, you could be hit with a significant reduction in benefits that will last the rest of your life.

3. It doesn’t work long enough

To qualify for retirement benefits, you’ll need to have worked and paid Social Security taxes for at least 10 years. However, to maximize your benefits, you’ll need at least 35 full years of work.

Your benefit is calculated using an average of your salary over the 35 years of your highest earning career. This average is analyzed through a complex formula and adjusted for inflation, resulting in the amount you will receive by filing with the FRA.

Work less than 35 years and you’ll have zeros added to your average to account for any time you didn’t earn income. This will lower your average and reduce your benefit amount. While sometimes it’s not possible to work the full 35 years for reasons beyond your control, it’s still wise to at least know how this factor will affect the size of your payments.

Social Security can be a retirement lifeline for many people, and every dollar counts. By understanding how these factors will affect your payments, you can make the most of the benefits and build a more secure financial future.