There's a pretty good chance Social Security will end up becoming a retirement income source you depend on a lot, so it's important to be strategic when filing for benefits.
But before you can even begin to think about claiming benefits, it's essential that you understand the rules involved. And recent data reveals that Americans are sorely misinformed about one key Social Security rule that's an important one to understand.
There are long-term consequences to filing for benefits early
One positive thing about Social Security is that seniors get a choice as to when to file. Now you're entitled to your complete monthly benefit -- without a reduction -- once you reach full retirement age, or FRA. That age is either 66, 67, or somewhere in the middle, depending on your year of birth.
However, you can sign up for Social Security as early as age 62. Doing so means getting your money sooner, so it's an option that may be enticing. But for each month you claim Social Security ahead of FRA, your benefits shrink. And if you sign up for benefits at age 62, you'll reduce them by 25% to 30%, depending on your specific FRA.
Worse yet, once you slash your benefits by filing early, you'll be stuck with lower payments for life. But that's something that may not be abundantly clear.
In a recent Nationwide Retirement Institute survey, 49% of respondents mistakenly thought that if they claim Social Security early, their benefits will be bumped up to their full amount once FRA kicks in. But not only is that not true, it also doesn't make any sense.
Think about it -- why would Social Security give you the option to claim benefits early without penalty? If that were the case, everyone would probably sign up for benefits at age 62.
And so to be clear, if you slash your monthly benefits by filing early, you should expect to continue receiving that lower amount from Social Security throughout your retirement. The only exception is if you manage to undo your filing within 12 months of starting to receive your benefits.
The Social Security Administration will allow you one do-over in your lifetime, but to take advantage of that option, you'll need to repay all of the money you've collected in benefits to date. That's something many seniors aren't able to do.
Know the rules
You might think you can get away with claiming Social Security early, dealing with a lower monthly benefit for a number of years, and then getting a higher benefit later on. But unless you take advantage of the aforementioned do-over option, if you sign up for benefits early and slash them in the process, you'll be stuck with a lower monthly payday forever. Make sure that's something you can manage before filing for benefits ahead of FRA.
In fact, prior to claiming benefits, it definitely pays to spend some time reading up on Social Security's various rules. Doing so could help you identify the most suitable filing age -- and spare you the consequences of making a mistake that leaves you cash-strapped throughout your retirement.