Social Security is the foundation for many Americans’ retirement plans. However, not everyone knows all the details of how the government program works. There are a few basic rules that everyone should know, but the knowledge of many Americans falls short of even the most basic and important rules that govern the program.
If you don’t know the basics of Social Security, it becomes impossible to make an informed decision about when to claim your retirement benefits. Filing for benefits too early (or too late) could have serious long-term consequences for your retirement goals. Unfortunately, nearly half of Americans have misconceptions about how claiming benefits early will affect their monthly benefits, according to a recent survey from Nationwide.
A costly wrong belief
In the survey, 48% of Americans incorrectly identified the following statement as true: “If I file for benefits early, my benefits will automatically increase when I reach full retirement age.”
Most readers will reach full retirement age at age 67, despite being eligible for Social Security benefits at age 62. But there’s no free lunch when it comes to these benefits. The truth is, you’ll want to claim your benefits before you reach full retirement age permanent reduce your monthly benefit.
The following table shows how much less you can expect compared to your full retirement age if you file early.
|
Claim age |
% of full benefit |
|---|---|
|
62 |
70% |
|
63 |
75% |
|
64 |
80% |
|
65 |
86.7% |
|
66 |
93.3% |
|
67 |
100% |
For Americans with a full retirement age of 67 (born in 1960 or later).
Table source: Author. Data source: Social Security Administration.
Why is this misunderstanding so common?
There’s a reason why many people mistakenly believe that you’ll see an increase in benefits when you reach full retirement age. That’s because sometimes you actually do that. But that’s only due to another often misunderstood rule: the Social Security income test.
The Social Security Earnings Test says that if you earn more than a certain amount while receiving retirement benefits before your full retirement age, the Social Security Administration will withhold a portion of your monthly benefits. The amount withheld will be included in your monthly benefit once you reach full retirement age. At that time, the income test no longer applies and the SSA will no longer withhold your benefits.
In this context, the final size of your check is mainly determined by the age at which you first apply for social security. If you never exceed the income test threshold in a given year, you will never see a change in the amount you receive beyond the annual COLA.
Many Americans also don’t know how the Social Security income test works. Only 56% of respondents correctly answered a question about this in the Nationwide survey.
The means test is the exception to the rule, not the rule itself. It’s important to make that distinction to avoid confusion when making a decision about when to apply for benefits.
It pays to procrastinate
All things being equal, it’s usually beneficial to wait to claim your benefits, possibly even until after your full retirement age.
If you choose to wait to claim your benefits, the Social Security Administration will increase your monthly benefit by 2/3 percentage points for each month you delay past full retirement age. Those deferred retirement credits max out at age 70, meaning someone with full retirement age of 67 could get a 24% increase in their monthly checks.
A 2019 United Income survey found that the majority of seniors (57%) would be better off if they waited until age 70 to claim their retirement benefits. Only 8% would benefit from a claim before the age of 65.
However, there are plenty of good reasons to claim early.
First, if the quality of your life with the supplemental income is significantly higher than without it, then it probably makes sense to claim it when you need it. There are steps you can take later as your situation improves to limit the impact of an early claim.
Another situation is when you have a reasonable expectation that you will die earlier than your peers. Social Security is designed to pay approximately the same amount of lifetime benefits to someone with an average life expectancy regardless of when he or she applies for benefits. But if you suffer from a condition that reduces your life expectancy, it may make sense to claim your benefits earlier.
No matter when you decide to make a claim, make sure you do so with a full understanding of how your claiming age will affect your monthly benefit and whether or not you should expect your benefit to increase in the future.
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Nearly Half of Americans Are Dead Wrong About This Critically Important Social Security Rule Originally published by The Motley Fool
