March 11, 2015 | by Chris Stein, CFP®, Finance Instructor at Colorado State University
Benefit Reduction For Claiming Early

Today we discuss the reduction in monthly benefits as a result of claiming your retirement benefit prior to your full retirement age (FRA).  Most people know that if you claim your benefit before your FRA your benefit is reduced.  And many people have heard that if you claim at age 62 (your age of first eligibility) the reduction amount is 25%, but this is not the whole story.  The rule is NOT that you receive a 25% reduction at age 62, but rather you experience a reduction based on the following rules:

1. For every month you are claiming prior to your FRA the reduction is 5/9 of 1% up to 36 months
2. For every month BEYOND 36 you are claiming early the reduction is 5/12 of 1%

These rules generate a 25% reduction at age 62 for someone with a FRA of 66 using the following math:

36 months X 5/9 = 20

12 months X 5/12 = 5

Added together 20 + 5 = 25%

However, starting in 2017 people born in 1955 will begin turning 62.  As mentioned on previous blogs, people born after 1954 have a FRA that is HIGHER than age 66.

So someone retiring at age 62 who was born in 1955 has a FRA that is 66 and 2 months.  This causes a reduction of benefits in the amount of 25.83%, not 25%.  This reduction amount slowly increases every year until it ultimately reaches 30% for those born in 1960 and after.  The math for a person born in 1960 with a FRA of 67 is as follows:

36 months X 5/9 = 20

24 months X 5/12 = 10

Added together 20 + 10 = 30%

If you visit our Resources page, you can see the complete reduction comparison by year of birth.

Make sure you understand the full reduction that affects you based on your year of birth.  Starting in 2017 things begin to change.