For many people, the age of 65 is considered the standard retirement age for a few different reasons, including the fact that Medicare becomes available then. But if you’re planning on quitting work and claiming your Social Security benefits at 65, this is a decision you may end up regretting. Here’s why it could be a good idea to rethink your plans.
Claiming Social Security at 65 will result in a benefits cut
One reason 65 is often thought of as the standard retirement age is that it used to be the full retirement age (FRA), or the age when you could claim your standard Social Security benefit. Of course, used to be, is the key phrase there. The age of 65 is no longer full retirement age and hasn’t been for a while. In fact, anyone who was born after 1942 has a later FRA — and everyone who hasn’t claimed their benefits yet was born beyond that year.
If you were anticipating retiring at 65 and getting your standard Social Security benefit, you’ll probably be surprised to discover your full retirement age is actually later. Depending when you were born, it’s between 66 and 67 — and retiring anytime before that has consequences.
In particular, there are three things that can happen if you claim Social Security at 65:
- You’ll be hit with early filing reductions. These reduce your benefit amount for every single month you claim benefits ahead of FRA. The monthly benefits reduction is a small one — 5/9 of 1% per month for each of the first three years you’re early and 5/12 of 1% for each year before that. But it adds up. In fact, retiring at 65 when your full retirement age is 66 could lead to a 6.7% reduction in the size of your standard benefit check.
- Working could affect your benefits. Many seniors want to continue getting paychecks even after starting Social Security — often because they’re worried they can’t live on their benefits and savings alone. The problem is, if you claim your benefits at 65, you’ll be subject to the retirement earnings test. This test applies to anyone who works before FRA. If you won’t reach FRA at all during the year — which is often the case if you retire at 65 — you’ll forfeit $1 in benefits for every $2 earned above $18,240 in 2020. And if you’ll reach FRA at some point during the year but haven’t hit it yet, you’ll still forfeit $1 in benefits for every $3 earned above $48,560. When you eventually hit FRA, your check size is recalculated to account for missed benefits — but that won’t help in the meantime if you lose Social Security money you were counting on.
- All of your future cost-of-living adjustments will be smaller on a dollar basis. That happens because your COLAs (Social Security raises) are calculated as a percentage of your current benefits. For example, in 2021, there’ll be a 1.3% COLA. While you’ll get the same percentage increase of your benefits as any other senior, taking a percentage of a smaller starting benefit means you get a smaller increase in terms of the dollar amount your check goes up.
If you want to avoid reducing your standard benefit due to early filing penalties, you don’t want to doom yourself to smaller COLAs for life, and you want to be able to work as much as you’d like in retirement without any worries about your benefits being forfeited, you’re going to have to wait until full retirement age.
And that’s after 65 for every future retiree — so if you were anticipating filing for benefits at 65, you’re going to have to think again.