Though it was designed more to supplement income, Social Security has evolved over the past couple of decades to become a primary source of income for our nation's retired workforce. A reduction in the number of work-based pensions and poor saving habits, along with increased life expectancies, have steadily increased the importance of this social program.
According to data from the Social Security Administration (SSA), more than 3 in 5 retired workers currently receiving monthly Social Security checks rely on their benefits to comprise at least half of their income. Yet despite its importance, there's a lot about Social Security that remains a mystery to the average American.
You may think you know a lot about Social Security, but you probably don't
According to a recently published Social Security survey conducted by Fidelity, the "Fidelity Investments Social Security IQ Survey," a lot of pre-retirees aged 55 to 61 are lost when it comes to the ins and outs of the program. Though 67% claimed to have a good understanding of Social Security, many of their answers proved incorrect with regard to some core program concepts.
Here's a quick run-through of the results, or should I say misconceptions:
- 74% of those surveyed were unable to correctly identify their full retirement age, or FRA. A person's FRA is the point at which they become eligible to receive 100% of their monthly benefit, and it's determined by their birth year. Without knowing when your FRA is, you could unknowingly claim benefits early and permanently reduce your payout.
- 65% didn't understand the proper timeframe to apply for benefits, which happens to be up to three months beforehand if you want to begin at the earliest age possible, age 62, and up to four months beforehand for all other ages. Nearly 1 in 10 pre-retirees was also under the impression that the SSA would contact them when it's time to claim, which isn't the case.
- Half (50%) of all pre-retirees surveyed believed that if a former spouse made a Social Security claim based on their work history it would reduce their monthly take-home. This is false. As long as the former spouses were married at least 10 years, an ex-spouse can choose between their own work history benefit or 50% of their former spouse's benefits, whichever is greater, without affecting the payment made to the former spouse.
The survey wasn't entirely bad news. For example, just 21% of those ages 55 to 61 said they planned to claim benefits at age 62, compared to 27% in 2008. A healthier economy and stronger stock market could entice seniors to wait longer to file claims -- and the longer they wait, the more their payments will grow. On average, Social Security benefits accrue at 8% for each year a person holds off on enrolling.
The scariest survey answer of all
However, the most damning response of all from Fidelity's survey came when it asked pre-retirees if they knew how much they'd be receiving monthly from Social Security once they filed their claim. More than a quarter (26%) had absolutely no clue how much they'd be paid monthly by the SSA. For that matter, the 14% who claimed they did know is a disturbingly low number.
Mind you, these are people aged 55 to 61 who are, based on a 2013 study from the Center for Retirement Research at Boston College, likely to claim benefits between ages 62 and 66. It means with just a few years left before these seniors begin receiving their monthly benefits checks, 26% have zero clue how much they'll be receiving. Yet, per the survey, 79% of those ages 55 to 61 are counting on their Social Security benefits to help make ends meet during retirement. It's a frightening contradiction.
Perhaps the greatest irony of all is that it's exceptionally easy to figure out how much you'll be paid once you file your claim. Though Social Security does send out benefit statements every five years to workers that detail their estimated monthly payment at full retirement age, you don't have to wait for this statement to get a bead on where you stand.
The SSA provides a retirement benefits estimator on its website that can help significantly narrow down what you'll be paid. As long as you have enough work credits (40) to qualify for benefits and aren't age 62 yet, the estimator will allow you to input personal information to come up with an estimated monthly benefit.
Another idea? Create a My Social Security account. Creating an online account with the SSA will give you quick access to frequently asked questions, as well as provide you the tools needed to estimate your monthly benefits payment once you file a claim.
Long story short, there's absolutely no reason for anyone nearing their retirement age to not know, within a fairly close approximation, how much they'll be paid each month once they enroll in Social Security.
Don't forget about your FRA
It's also important, once you have this estimated monthly payout, for you to think about your claiming decision as it relates to your full retirement age. Remember, roughly three-quarters of soon-to-be retired workers are clueless what their FRA is, yet this handy table from the SSA will tell you everything you need to know.
In as simple an explanation as possible, if you claim before your FRA, you'll be accepting a permanent reduction in your monthly payout. Based on your birth year, this could equal up to a 30% cut in monthly benefits relative to your estimated FRA benefit. If you delay your claim until after your FRA, your payout will be bigger by as much as 24% to 32%, depending on your birth year.
Use the data the SSA has available, analyze your financial retirement needs, and make an informed decision that'll allow you to get the most you can out of Social Security.