Millions of retirees rely on Social Security to make ends meet during retirement. In fact, 61% of beneficiaries rely on Social Security benefits for at least half their income, according to the Social Security Administration.
To be sure, Social Security is a fantastic program for retirees — especially if your personal retirement savings aren’t quite where you’d like them to be. However, it can be confusing at times. There’s a lot to think about as you’re preparing to file for retirement benefits, such as when you should claim them, how much money you can expect to receive throughout retirement, how your decisions may affect a spouse or surviving family members, and more.
Fortunately, Social Security is not such a complex program that an ordinary person can’t understand it — especially if you can relieve yourself of some popular misconceptions. There are several common myths and misunderstandings surrounding Social Security, and they could potentially cost you thousands of dollars.
Myth No. 1: There’s a “right” age to claim benefits
Some people say you should never claim benefits before age 70. Others say 62 is the best age to file. The truth is that there’s no “right” age to claim benefits; it largely depends on your unique financial situation.
While there’s no one-size-fits-all approach to choosing when to claim benefits, it is important to understand how your age affects how much income you’ll receive. You can start claiming benefits at any point between the ages of 62 and 70, but if you claim at 62, your benefits will be reduced by up to 30% — permanently. If you wait, though, you can take advantage of delayed retirement credits, meaning that for every month you wait to claim benefits, you’ll receive slightly bigger checks. If you wait until your full retirement age (which is between 66 and 67 depending on the year you were born), you’ll receive 100% of the benefits you’re entitled to. If you wait until age 70, you’ll receive a boost in benefits of up to 32% on top of the full amount you’re entitled to.
Choosing when to file for Social Security benefits is a personal decision. Sometimes you don’t have a choice in the matter — for example, if you’re forced into retirement and you need that extra income to make ends meet. But if you’re falling behind on your savings and you have a choice about when to start claiming benefits, you may choose to wait as long as possible so you can continue working, building up your retirement fund, and earning delayed-retirement credits.
In theory, the lifetime amount you receive in benefits should be roughly the same regardless of when you start claiming. If you claim early, you’ll receive more, smaller checks, while if you wait a few years, you’ll receive fewer, bigger checks.
However, you’ll receive those benefits for the rest of your life, so if you have reason to believe you’ll live into your 90s or beyond, it may be smart to delay benefits so you can take advantage of those bigger checks for several decades. For instance, say your full retirement age is 67 and the full amount you’re entitled to is $1,400 per month (about the average monthly benefit at the moment). If you claim at 62, your benefits will be reduced to $980 per month (or $11,760 per year), but if you wait until age 70, you’ll receive $1,736 per month ($20,832 per year). By age 80, you’d have earned a total of $211,680 if you had claimed at 62 or $208,320 if you claimed at 70. However, by age 90, your total benefits if you claimed at 62 versus 70 would be $329,280 and $416,640, respectively — a difference of more than $87,000.
Myth No. 2: You have to start claiming benefits when you retire
Retiring and claiming Social Security benefits are often thought to go hand in hand, but they don’t have to happen at the same time. If you think you’re required to claim benefits as soon as you retire (even if you don’t necessarily need that money to get by), you could be missing out on the bigger checks you could receive by waiting a few years to claim.
For example, say you have a well-funded retirement account and are ready to retire at age 65. You may choose to leave your job and use your savings to pay the bills while delaying benefits until age 70, which will allow you to start enjoying retirement earlier while still earning the boost in benefits you get by waiting to claim.
Likewise, you can also claim benefits and then continue to work. If, for example, you want to ease into retirement by leaving your full-time job and picking up a part-time or seasonal position, you may need Social Security benefits to make the transition a little easier financially, but you don’t need to be fully retired.
Myth no. 3: You lose your benefits permanently if you work during retirement
If you choose to continue to work (even part-time) after you claim Social Security but before your full retirement age, your benefits may be reduced — but you they won’t be gone forever.
The amount by which your benefits will be reduced depends on your age and how much you’re earning at your job. The Social Security Administration sets yearly earnings limits for the years leading up to your full retirement age, as well as the year in which you reach your full retirement age. If you earn more than that limit, your benefits will be reduced.
For 2018, the earnings limit between age 62 and the year in which you reach your FRA is $17,040. For every $2 you earn over the $17,040 limit, your benefits will be reduced by $1. In the year in which you reach your FRA (not including the month you reach that age), the earnings limit is $45,360. For every $3 you earn above that limit, you’ll see your benefits cut by $1. Those limits disappear as soon as you reach your full retirement age, and your base benefit amount will also be recalculated to make up for the benefits you forfeited.
While this means you should still receive the benefits you’re entitled to, a misunderstanding of how the system works could lead retirees to think they can’t work during retirement or else they’ll lose their benefits. And if you choose not to work, you could be missing out on income that could go a long way in helping you make the most of your golden years.
Social Security can be confusing, but the more you know, the better chance you’ll have at making the most of your benefits. By separating truth from fiction, you can make more strategic decisions that maximize your retirement income.