Social security It is the basis of the retirement plans of many Americans. However, not everyone knows all the details about how the government program works. There are some 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 how Social Security works, making an informed decision about when to claim your retirement benefits becomes impossible. Applying for benefits too early (or too late) can have serious long-term ramifications for your retirement goals. Unfortunately, nearly half of Americans hold an incorrect belief about how claiming benefits early will affect their monthly benefits, according to a recent study by Nationwide.
A false and costly belief
In the survey, 48% of Americans incorrectly identified the following statement as true: “If I claim benefits early, my benefits will automatically increase when I reach full retirement age.”
Most readers will reach full retirement age at age 67 although they become eligible to claim Social Security benefits at age 62. But there is no free lunch when it comes to these benefits. The reality is to claim your benefits before you reach full retirement age always Reduce your monthly interest.
The following table shows the lower amount you can expect to receive compared to full retirement age if you claim early.
|
Age claim |
% of the full benefit |
|---|---|
|
62 |
70% |
|
63 |
75% |
|
64 |
80% |
|
65 |
86.7% |
|
66 |
93.3% |
|
67 |
100% |
For Americans who have reached full retirement age 67 (born in 1960 or later).
Table source: author. Data source: Social Security Administration.
Why is this misunderstanding so widespread?
There’s a reason why many people hold the false belief that you’ll see an increase in benefits when you reach full retirement age. That’s because sometimes you already do it. But that’s just because of another commonly misunderstood rule: the Social Security earnings test.
The Social Security earnings test says if you earn more than a certain amount while collecting retirement benefits before full retirement age, the Social Security Administration will withhold some of your monthly benefits. The amount withheld is counted back into your monthly benefits once you reach full retirement age. At this point, the earnings test is no longer applicable, and the Social Security Administration (SSA) is no longer withholding any of your benefits.
In this context, the final size of your check is determined primarily by the age at which you initially apply for Social Security. If you never exceed the earnings test limit in a given year, you will never see a change in the amount you collect besides your annual COLA.
Many Americans don’t realize how the Social Security earnings test works either. Only 56% of survey respondents correctly answered a question on this topic in the Nationwide survey.
The earnings test is the exception to the rule, not the rule itself. It is important to make this distinction to avoid confusion when deciding when to claim benefits.
It causes delay
All things being equal, it’s usually beneficial to wait to claim your benefits, perhaps until after full retirement age.
If you choose to wait to claim your benefits, the Social Security Administration will increase your monthly benefits by 2/3 of a percentage point for each month you delay beyond full retirement age. Late retirement credits are capped at age 70, meaning someone who reaches full retirement age of 67 could get a 24% boost in their monthly checks.
A 2019 study by United Income found that the majority of seniors (57%) would be better off waiting until age 70 to claim their retirement benefits. Only 8% will benefit from claiming before the age of 65.
However, there are plenty of good reasons to claim early.
First, if your quality of life with the extra income is much higher than without it, it makes sense to claim it when you need it. There are steps you can take later if your condition improves Mitigating the impact of early claims.
Another situation is when you have a reasonable expectation that you will die before your colleagues. Social Security is designed to pay approximately the same amount in lifetime benefits to someone who lives the average life expectancy regardless of when they claim. But if you have a condition that limits your life expectancy, it may make sense to claim your benefits early.
No matter when you decide to claim, be sure to do so with a full understanding of how age of claim will affect your monthly benefits and whether or not you should actually expect your benefits to increase in the future.
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Nearly half of Americans are completely wrong about this critically important Social Security rule Originally published by The Motley Fool