Social Security is one of the most important social program for seniors in retirement. Research from Gallup suggests that almost 60% of current retirees rely on Social Security income to comprise a major part of their monthly income, while another 30% rely on Social Security as a minor income source. In theory, 90% of today's retirees could be in some degree of financial trouble if they didn't have Social Security in their corner.
But the honest truth is that most people -- especially those who've yet to retire -- aren't well versed on the ins and outs of Social Security. When it comes to Social Security, ignorance is far from bliss, as ignorance to the program's rules could wind up costing you valuable income in retirement.
A 2015 survey conducted by AARP with the help of The Financial Planning Association questioned Americans between the ages of 45 and 64 about their Social Security knowledge. The result was a number of frightening things you'll be shocked that the respondents weren't aware of.
1. The percentage increase in benefits you get by waiting until your FRA to file for benefits
The key to Social Security is in understanding that your benefit revolves around your full retirement age, or FRA. Your FRA is a dynamic number that changes based on your birth year. FRAs for today's retirees, and baby boomers who've yet to retire, is either 66 years or 67 years. Your FRA is the age at which you're entitled to receive 100% of your Social Security benefits.
The survey questioned more than 1,000 Americans about their knowledge of how much their benefits would increase if they waited to file for benefits until their FRAs, rather than 62, when they can first claim benefits. Just 5% -- five percent -- knew the correct answer, which is between 25% and 30%. Two-thirds of respondents underestimated the answer, and 16% overestimated, while another 15% were close, but missed the mark by about 5%.
What the survey reveals is that people generally understand that waiting to file for benefits will reward them, but they have little clue how much they're accruing each year, on average, by waiting. The general rule is that you'll gain 8% per year by waiting to file, with accruals capping off at age 70, where your payment could be 124% to 132% of your FRA, depending on your birth year.
2. Earliest age to claim benefits to receive the highest possible monthly benefit
When more than 1,200 pre-retirees were asked about the earliest age they could claim Social Security benefits in order to maximize their monthly benefits, the result was once again shocking. Just 32% of respondents correctly guessed age 70, which is the age at which you'd receive between 124% and 132% of your FRA. The responses showed that 15% believed ages 62 to 65 would maximize their benefit, 34% thought ages 66 to 69 would lead to the highest benefit possible, and another 15% believed it was age 71 or beyond.
This could mean that around half of all pre-retirees could mistakenly file for benefits before they reach age 70, unknowingly cheating themselves out of their maximum benefits.
Keep in mind that although the Social Security Administration suggests that benefits be relied on to replace around 40% of your working wages, many seniors are clearly leaning on the program more heavily. If you're lacking in the retirement savings department, it would behoove you to know what the earliest age is to maximize your monthly benefit, since you'll like be relying on Social Security income during retirement.
3. Understanding Social Security benefit deductions while working
Nearly 800 pre-retirees had difficulty answering AARP's question concerning Social Security benefit deductions while working.
Assuming an American has enough work credits to qualify for Social Security, they have the ability to file for benefits as early as age 62. Unfortunately, filing for benefits early and remaining in the workforce can reduce the amount of Social Security income you take home. According to SSA guidelines in 2016, if you file for benefits before reaching your FRA, your earnings limit is $15,720. For every $2 you earn above and beyond this threshold, the SSA will deduct $1 from your benefits. If you'll hit your FRA this year but have yet to do so, the SSA earnings threshold rises to $41,880 as of 2016. Every $3 in income earned beyond this threshold results in a $1 deduction from your benefits.
AARP asked respondents whether or not they'd get these deducted benefits back if they filed for benefits before reaching their FRA and made $40,000 a year. Some 57% of respondents believed they were gone forever, which is wrong.
Deductions taken while working are returned to you in the form of a higher monthly benefit once you hit your full retirement age. Of course, if you were counting on an earnings boost between ages 62 and your FRA, and you happen to still be working, you could be in for quite the surprise.
4. Claiming benefits based on an ex-spouse's work record
The AARP survey also questioned more than 1,000 people (those who'd ever been married) about their knowledge of how long a couple would have to be married before someone could collect Social Security benefits based on their ex-spouse's work record. The correct answer is the couple would need to married for 10 years in order for one spouse to collect off the work record of their ex, and only 26% of respondents answered this correctly. Around a third guessed five years or fewer, and nearly another third believed the answer was "never."
Understanding ex-spouse benefits can be particularly important in scenarios where there's a large lifetime income gap between two formerly married people. If the lower-income individual isn't aware that he or she can claim benefits based on their ex-spouse's work record (without affecting his or her benefit), and if they were married at least 10 years, the lower earning spouse could be foregoing a higher benefit than what their own work history pays.
If you're not "in the know" when filing for Social Security benefits, you could be costing yourself a lot of money and a comfortable retirement.