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3 Facts Most People Get Wrong About Social Security

By Katie Brockman – Sep 15, 2019 at 7:02AM

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Even simple misunderstandings can be costly in retirement.

For many retirees, Social Security is a crucial component of retirement -- roughly half of single beneficiaries and one in five married couples rely on their benefits for at least 90% of their retirement income, according to the Social Security Administration (SSA).

When Social Security benefits can make or break your retirement, it's smart to be well informed about how the program works. Misunderstandings can lead to making less than ideal decisions, and if you're depending on your benefits to make ends meet, you can't afford that.

There are a few components of Social Security benefits that most people don't understand. They may seem simple, but misunderstandings could affect your entire retirement.

Social Security card and hundred dollar bill

Image source: Getty Images

1. Social Security is not going to collapse

It's a common misconception that the program is going bankrupt and will collapse by the time workers are ready to claim benefits. In fact, more than three-quarters (78%) of workers think the program is going to run out of money in their lifetime, according to a survey from the Nationwide Retirement Institute.

While it is true that Social Security is facing some financial troubles, the program is not on the brink of collapse. As long as workers continue to pay their taxes, there will always be at least some money to pay out as benefits. That said, benefits could be reduced in the next few decades.

Right now, with baby boomers retiring in droves, there's more money flowing out of the system in benefits than is coming in from taxes. To bridge the gap, the SSA has dipped into its trust funds to find enough cash to continue paying benefits in full. But those trust funds are expected to run dry in 2035, meaning the only money available to pay out in benefits will be what comes in from taxes. Unless Congress does something to fix the problem before then, benefits may be slashed by roughly 20% to 25%.

That cut in benefits would still be significant, but it's not as drastic as the notion that the program is falling apart. And if you know that there's a chance benefits may be reduced, you can beef up your savings accordingly.

2. There are several factors that impact how much you'll receive each month

The amount of your benefits depends on multiple factors, yet 91% of U.S. adults age 50 and over don't know what those factors are, the Nationwide Retirement Institute found.

One of the most important factors that affects your benefit is your full retirement age (FRA) and whether you claim before or after that. For those born in 1960 or later, your FRA is 67. Anyone born between 1943 and 1959 will have a FRA of either 66 or 66 plus a number of months. In order to receive the full benefit amount you're entitled to each month, you'll need to wait until your FRA to claim. If you claim earlier (as early as age 62), your benefits can be reduced by up to 30%. But if you wait until after your FRA to claim (up to age 70), you'll receive extra money each month on top of your full amount.

Despite all this, more than two-thirds (68%) of soon-to-be retirees don't know what their FRA is, according to a survey from Nationwide. Even more surprising is that a whopping 82% of those who have been retired at least 10 years don't know their FRA, either. So these retirees likely claimed benefits not knowing how their monthly checks were affected by their age at the time.

Your FRA isn't the only factor that impacts your benefits, either. Another thing to consider is how many years you've been working. Your basic benefit amount (or the amount you'd receive by claiming at your FRA) is based on your 35 highest-earning years of your career. If you don't work a full 35 years, you'll have zeros added to the equation for the years you weren't working. And if you work more than 35 years, you may be able to raise your average by replacing some of your lower-earning years from early in your career with more recent, higher-earning years.

3. You can check your estimated benefit  online before you claim

When it comes to figuring out how much you'll be receiving from Social Security, you don't need to wait until it's time to claim. By checking your statements online, you can see your estimated benefit based on your real earnings.

Most people are in the dark about what they'll receive. The majority (57%) of workers don't check their statements, according to a report from the SSA. When you don't know how much you can expect to receive in benefits, it's tough to know how much you need to save for retirement. Social Security benefits alone won't be enough to cover all your expenses, but if you don't know what you're earning in benefits, you won't know how much they actually will cover and what needs to come from your own savings.

To check your statements online, create a mySocialSecurity account. From there, you can get an estimate of your future benefits. That can also help you determine when to claim. 

Social Security is so important in retirement that you need to learn as much as you can before you start claiming it. The more you understand, the better your chances to make your money last as long as you do.

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