Social Security serves as a cornerstone for the retirement plans of many Americans, yet a surprising number of people are unfamiliar with the intricacies of the program. While there are some fundamental rules everyone should grasp, many Americans lack even a basic understanding of the essential guidelines that govern Social Security. Without a clear grasp of how Social Security operates, making well-informed decisions about when to claim retirement benefits becomes nearly impossible. Claiming benefits too early or too late can seriously affect your long-term retirement objectives.
A recent survey by Nationwide revealed that almost half of Americans hold a mistaken belief about the timing of benefits: 48% incorrectly asserted that claiming benefits early would result in an automatic increase upon reaching full retirement age. Most individuals will reach full retirement age at 67, although they can start claiming benefits as early as age 62. However, claiming benefits early comes at a cost; it will permanently decrease your monthly payments. For those whose full retirement age is 67 (born in 1960 or later), here are the reduced benefits you can expect based on your claiming age:
– Age 62: 70% of full benefit
– Age 63: 75%
– Age 64: 80%
– Age 65: 86.7%
– Age 66: 93.3%
– Age 67: 100%
This misunderstanding is widespread, partly because people may confuse it with another misunderstood rule: the Social Security earnings test. This test states that if you earn above a certain threshold while collecting benefits before reaching full retirement age, some of your monthly benefits will be withheld. However, once you hit full retirement age, that withheld amount is factored back into your monthly benefit. Still, if you don’t exceed the earnings test limit in any given year, your benefit remains unchanged, except for the annual cost-of-living adjustments (COLA).
Only 56% of survey respondents correctly understood the earnings test, emphasizing that it’s an exception rather than the rule about how benefits work. Making this distinction is crucial when deciding when to claim benefits.
In general, it is advantageous to delay claiming benefits, potentially even past full retirement age. For each month you wait beyond full retirement age, your monthly benefit increases by two-thirds of a percent, with these delayed retirement credits maxing out at age 70. A person with a full retirement age of 67 can receive a 24% increase in their monthly benefit by waiting until age 70. A study by United Income in 2019 found that 57% of seniors would be financially better off if they waited until age 70 to claim benefits, while only 8% would gain from claiming before age 65.
There are valid reasons for claiming early. If receiving supplemental income significantly enhances your quality of life, it may be worthwhile to claim when you need it. Additionally, if you have health concerns that may limit your life expectancy, claiming early could be beneficial. Social Security is designed to provide similar lifetime benefits regardless of when you claim, but those with shorter life expectancies may find that claiming benefits sooner is advantageous.
Regardless of when you choose to claim, it’s essential to have a thorough understanding of how the age at which you claim affects your monthly payments and whether you can expect your benefit to increase in the future. If you’re like many Americans, you may feel behind in your retirement savings. However, you can uncover several little-known strategies that could significantly boost your Social Security income—one simple trick, for instance, could increase your annual benefits by as much as $22,924! By learning to optimize your Social Security benefits, you can approach retirement with the confidence and peace of mind many are seeking.
