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What You Don't Know About Social Security Can Hurt Your Retirement

By Christy Bieber – Jul 8, 2020 at 8:19AM

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Don't make a mistake that reduces your benefit.

Chances are good that Social Security benefits will be a key source of income in retirement. In fact, for half of older married couples and seven in 10 unmarried seniors, at least half of household income is from the Social Security Administration (SSA). And for one in five married retirees and 45% of singles, a whopping 90% of every dollar coming in is from the SSA.

But while seniors may rely on their retirement benefits to cover basics, many pre-retirees have major knowledge gaps that could cause their benefit checks to be far smaller than they could be.

And this could easily happen to you if you don't know these three key facts about how your retirement benefits work. 

Social Security card with money sitting on it.

Image source: Getty Images.

1. How benefits are calculated 

Your standard Social Security benefit is based on a percentage of average wages earned over the 35 years when your inflation-adjusted earnings are highest. But most people don't realize that. Just 8% of older adults understand how to get the maximum benefit, according to a survey last year by Nationwide

When you know that your earnings over your career affect your benefit, you can make sure you're in the workforce for a full 35 years or put in an extra year or two so higher-earning years later in your career can replace lower-earning ones.

But if you don't know how the benefits formula works, you could reduce your benefit by working too few years or quitting at the peak of your earning power. 

2. How early filing affects your checks

If you file before full retirement age (FRA), you'll reduce the size of your checks. But most people don't realize how this works. In fact, fewer than a quarter of all older adults even know what their full retirement age is, and the average future retirees believe they'll be eligible for full benefits at 63, according to Nationwide's survey -- a full three years earlier than the earliest FRA.   

Full retirement age is between 66 and 67 depending on when you were born. Each month you retire earlier, you face monthly penalties that add up to a 6.7% annual benefits reduction for the first three years and an additional 5% per year if you're more than three years early.

If you don't know that, you won't understand that claiming ahead of schedule will substantially reduce your monthly benefit. 

3. What the rules are for spousal or survivors benefits

Spousal and survivors benefits are one of the most confusing aspects of Social Security.

According to Nationwide, 39% of pre-retirees don't know the higher benefit is inherited by the surviving spouse after one spouse passes away. The same percentage of future retirees are unaware that they could be eligible for spousal or survivors benefits even after a divorce, as long as the marriage lasted 10 years or longer. 

Because spousal and survivors benefits substantially increase household income and help ensure the surviving spouse has sufficient income after being widowed, it's essential to work with your spouse to devise a Social Security claiming strategy that maximizes total benefits received. These guides to spousal and survivors benefits can help. 

Don't let a knowledge gap cut your retirement income

Since Social Security is likely to provide thousands of dollars in annual income, it makes sense to learn how the program works and make a fully informed choice about when to start receiving benefits. This guide to Social Security benefits is a good place to start learning. 

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