Misunderstanding this key aspect of Social Security can cause significant issues.
Social Security serves as a crucial part of many retirement plans for Americans. However, not all individuals are clear on how this government program operates. There are essential rules everyone should be aware of, but many Americans lack basic understanding of these important guidelines.
If you are unaware of the basic functions of Social Security, you may find it challenging to make informed choices about when to claim your retirement benefits. Opting to apply too early (or too late) can have lasting negative effects on your retirement objectives. Sadly, recent research from Nationwide reveals that close to half of Americans hold an incorrect assumption about the impact of early benefit claims on their monthly payouts.
A Costly Misbelief
In the survey conducted, 48% of respondents wrongly believed the statement: “If I claim benefits early, my benefits will automatically increase upon reaching full retirement age” to be true.
Most people will reach their full retirement age at 67, even though they can start claiming Social Security benefits as early as 62. However, there are no hidden perks in this situation. The reality is, claiming your benefits early will result in a permanent decrease in your monthly payout.
Below is a chart showing the reduction in expected benefits when claiming early.
For individuals with a full retirement age of 67 (born in 1960 or later). Table source: Author. Data source: Social Security Administration.
Why Does This Misunderstanding Exist?
There’s a reason many individuals wrongly believe that their benefits will increase once they reach full retirement age. In certain cases, that is true, but it is due to another often-misunderstood rule called the Social Security earnings test.
The earnings test indicates that if you earn more than a specified amount while collecting retirement benefits before reaching full retirement age, your monthly benefits will be reduced. Any amounts withheld will be added back to your monthly benefits when you reach full retirement age. After that age, the earnings test is no longer in effect, and no further reductions will occur.
In this situation, the overall size of your benefits is mainly influenced by the age at which you first apply for Social Security. If you don’t surpass the earnings test limit in a year, your monthly payments will remain unchanged except for any annual cost-of-living adjustments (COLA).
Many Americans also lack an understanding of how the earnings test operates. Only 56% of those surveyed accurately answered questions regarding it in Nationwide’s survey.
It’s crucial to recognize that the earnings test is an exception to the general rule, which can help avoid confusion when considering when to approach claiming benefits.
The Advantages of Delaying
Generally, it’s advisable to wait before claiming your benefits, potentially even beyond your full retirement age.
If you choose to delay claiming your benefits, the Social Security Administration will raise your monthly benefit by 2/3 of a percentage point for each month you postpone past your full retirement age. These additional credits cap at age 70, meaning for someone whose full retirement age is 67, they could see a 24% increase in their monthly benefits.
Research from United Income in 2019 revealed that a significant majority of seniors (57%) would be better off by waiting until age 70 to start collecting their retirement benefits. Comparatively, only 8% would find it advantageous to start claiming before age 65.
However, there are valid reasons for claiming early.
If your quality of life improves significantly with additional income, it makes sense to claim benefits when you truly need them. You can always take measures later to lessen the effects of opting for early claims if your financial situation changes for the better.
Additionally, if you anticipate living a shorter life than average, it may be wise to claim your benefits sooner. Social Security aims to provide similar lifetime benefits regardless of when you choose to claim, but if you have a condition that limits your lifespan, claiming early might be more beneficial.
Regardless of when you choose to claim, ensure that you fully understand how your claiming age affects your monthly benefits and whether you should expect any future increase in your payout.
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