For many retirees, Social Security is the difference between enjoying a comfortable retirement and barely scraping by. Nearly half of married beneficiaries rely on their Social Security checks for at least 50% of their income, according to the Social Security Administration, and around 21% rely on their benefits for at least 90% of their retirement income.
However, despite the fact that Social Security is a crucial factor in many beneficiaries’ retirement plans, very few people fully understand how the program works. In fact, a whopping 91% of adults age 50 and older admit that they don’t know what factors contribute to how much they receive in benefits, a survey from the Nationwide Retirement Institute found.
You don’t need to know every last detail about how your benefit amount is calculated, but not having a good grasp on the basics of how the program works can lead to potential problems down the road. There are certain myths surrounding Social Security that may not seem harmful at first glance, but misunderstanding these core factors could cause you to miss out on extra retirement income.
1. The age at which you claim doesn’t affect how much you receive
You can claim Social Security benefits as early as age 62, which happens to be the most common age to claim — approximately 48% of women and 42% of men apply for benefits at age 62, according to a report from the Center for Retirement Research at Boston College.
However, by claiming that early, you won’t receive the full amount you’re theoretically entitled to. The only way to receive that amount is to claim at your full retirement age (FRA), which is age 66, 66 plus a few months, or 67. By claiming any earlier than your FRA, your benefits will be reduced by up to 30%.
If you’re in the dark about your FRA and how it affects your benefits, you’re not alone. Two-thirds of adults age 50 and over don’t know when they’re eligible to receive their full benefit amount, according to the Nationwide Retirement Institute, and of those people, 57% think they’re eligible sooner than they really are. So if you claim before your FRA thinking you’re going to receive the full amount you’re entitled to, you may be in for a surprise when your check is smaller than you expected.
On the other hand, you can receive a boost in benefits by waiting to apply for benefits until after your FRA. For every month you wait past your FRA to claim (up until age 70), you’ll receive slightly bigger checks — up to 32% more on top of your full amount, if you have a FRA of 66 years old.
2. The Social Security program is going bankrupt
There’s been a lot of fear and anxiety surrounding the health of the Social Security program, with concerns that the system is going to run out of money in the relatively near future. This concern is widespread among workers, with 77% percent of those who are not yet retired saying they’re concerned that Social Security benefits will not be available to them once they decide to retire, according to a report from the Transamerica Center for Retirement Studies.
While it’s true that the program is on shaky ground, it’s not on the brink of collapse. Right now, with baby boomers retiring in droves, there’s more money flowing out of the system in the form of benefits than coming in in the form of taxes. So that means the Social Security program is expected to deplete its cash reserves by 2035, according to the Social Security Administration’s 2019 Board of Trustees report.
That doesn’t mean that benefits will be eliminated, however. As long as workers continue to pay taxes, there will always be money that can be distributed as benefits. But it does mean that there may need to be cuts in benefits by 2035 — at this rate, the Social Security Administration estimates that the money coming in from taxes will only be enough to cover about 75% of projected benefits.
Some soon-to-be retirees who are concerned about their future benefits may think it’s a good idea to claim as early as possible before the program goes bankrupt. However, it may actually be wiser to delay benefits by a few years. If benefits are reduced in the future, those bigger checks you’d receive by waiting past your FRA to claim could help bridge the gap.
3. You have to claim benefits as soon as you retire
Retirement and claiming Social Security benefits often go hand-in-hand, but they don’t necessarily have to happen simultaneously. In fact, sometimes it’s a good idea to claim benefits before or after you stop working.
If you choose to retire and then realize you don’t have enough money to make ends meet, you may decide to pick up a part-time job even after you’ve started claiming benefits. Or if you’re passionate about your career and don’t want to stop working anytime soon, you may still choose to claim benefits to bring in some extra income — even if you don’t necessarily need it.
It is possible to continue working after you claim benefits, but if you haven’t yet reached your FRA, you may have your benefits (temporarily) reduced depending on how much you’re earning. In the years leading up to your FRA, your benefits will be reduced by $1 for every $2 you earn above the 2019 annual limit of $17,640. Then in the year you actually reach your FRA, your benefits will be reduced by $1 for every $3 you earn above a different limit of $46,920. These reductions aren’t permanent, though; once you reach your FRA, your benefit amount will be adjusted to account for the money you had withheld from your previous checks.
On the other hand, if you’re ready to retire now but want to take advantage of those bigger checks you’d receive by waiting to claim, you may choose to retire before you file for benefits. There are some instances where this makes sense. For example, if you expect to spend several decades in retirement, you may want those bigger checks for when your personal savings run dry. And if you have a solid nest egg now, you may be able to afford to retire now even without the help of Social Security benefits.
Social Security can be a complex topic, but understanding some of the more basic concepts can make it easier to make the most of your benefits. Especially if you’re going to be relying on your benefits for a good portion of your retirement income, learning as much as you can about how the system works can help maximize your money.