Anyway, here goes—numbers and all. I recently got an email from a reader who kind of chewed me out for allegedly misleading her about the percentage reduction that is applied to Social Security benefits if they are taken before full retirement age. I usually say that reduction is “about one-half of 1 percent” for each month benefits are taken early. Her email said that a Social Security representative told her the actual reduction is five-ninths of 1 percent. And that’s true—sort of. But as with so many government rules and regulations, there is a lot more to it than that. I‘ll explain those rules today, and once I’m done, I think you’ll see why I simply say the early benefit reduction is “about one-half of 1 percent.”
Part of the problem is that there are different reduction rates for different kinds of Social Security benefits. Let’s start with retirement benefits. If you take those benefits before you reach full retirement age, your Social Security checks will be reduced five-ninths of 1 percent for the first 36 months and five-twelfths of 1 percent for any remaining months. For example, if your full retirement age is 67, and you want to take benefits at 62, your benefit will be reduced five-ninths of 1 percent for the months from age 67 to 64. And then they will be reduced five-twelfths of 1 percent for the months from age 64 to 62. That comes out to a 30 percent reduction if your full retirement age (FRA) is 67. If your FRA is age 66, it would be a 25 percent reduction, and the reduction would be somewhere between 25 percent and 30 percent if your FRA is somewhere between 66 and 67.
Spousal benefits have a different set of reduction factors. The spousal reduction is 25/36 of 1 percent for the first 36 months and five-twelfths of 1 percent for any remaining months. That comes out to a 35 percent reduction if your FRA is 67 and a 30 percent reduction if your FRA is 66. And that reduction is applied to the normal spousal rate, which is half of the primary account holder’s full retirement age benefit. Here is an example of that.
Wilma’s full retirement age is 67. She was a stay-at-home mom and has no Social Security coverage of her own. Her husband, Fred, took his benefits at his FRA, and he is getting $3,000 per month. If Wilma waits until she is 67, she will get an amount equal to half of Fred’s benefit, or $1,500 per month. But she wants to take spousal benefits at 62. As I explained above, someone whose FRA is 67 will suffer a 35 percent reduction if she takes benefits at 62. Or to turn that around, at 62, she will get 65 percent of her normal spousal rate. So instead of getting $1,500, she will get $975 (65 percent of $1,500 equals $975).
Here’s a twist to the tale of benefit reductions for spouses. I was recently explaining this spousal reduction business to a reader (I'll call her Betty) who was in a boat like Wilma’s. Her full retirement age was 67, and she wanted to take spousal benefits on her husband’s record at 62. In an email exchange, Betty said she was confused because I said her reduction rate would be 35 percent (as noted above for Wilma). She said a Social Security Administration (SSA) rep she talked to on the phone said she was going to get a 32.5 percent spousal rate. I had to explain to her that we were both right, and here is why.
Let’s use the same numbers as in Wilma’s case above. So if Betty took benefits at 62, her normal spousal rate of $1,500 would be reduced by 35 percent, giving her a $975 monthly benefit. The SSA rep was telling her that she was going to get 32.5 percent of her husband’s full retirement benefit. And 32.5 percent of $3,000 equals $975.
This is why I just like to keep things simple by telling a woman that if she takes spousal benefits at 62, she’s going to get about a third of her husband’s full retirement age benefit.
Let me throw in one more note of clarification about spousal benefit rates. They are always based on the husband’s full retirement age benefit amount. We'll go back to Wilma and Fred. I said Fred’s FRA benefit was $3,000 per month. But let’s say Fred, whose full retirement age was 66, started his own benefits at 62. That means his benefit is reduced by 25 percent, meaning he’s getting only 75 percent of his $3,000 benefit, or $2,250. Wilma’s spousal rate is based on his FRA rate of $3,000 and not his actual benefit of $2,250.
To go to the other end of the benefit start date spectrum, let’s say Fred waited until age 70 to begin his benefits. That means he'll get a 32 percent bonus added to his monthly benefits. In other words, he is actually getting $3,960 per month. But again, Wilma’s spousal rate is based on Fred’s FRA benefit, or $3,000, not on his augmented benefit of $3,960.
I told you there would be lots of numbers in this column, and I haven’t even gotten into the reduction factors for widow’s benefits. I’m not going to get into them because it’s WAY too messy to explain. Those reduction factors can be anywhere from 19/40 of 1 percent to 19/48 of 1 percent to 57/152nds of 1 percent to 57/164 of 1 percent and on and on! If you want to really get into this stuff, then just Google “Social Security widow’s benefit reduction factors,” and, well ... good luck trying to understand it.
Once again, I try to keep things simple by telling a widow that she gets 100 percent of her husband’s benefit if she is full retirement age or older when he dies. The earliest she can get widow’s benefits is age 60, when she would get 71.5 percent. So the percentage she gets is somewhere between 71.5 percent and 100 percent if she is between 60 and FRA when she starts her widow’s benefit. And one other factor: Unlike benefits to a spouse with a living husband, widow’s benefits are based on the guy’s actual benefit, not his FRA rate.
One final note of clarification that should help most widows: Most of the time, a woman is well into her 70s or 80s when her husband dies. In those cases, the widow usually will just start getting what the husband was getting when he died.
