There's a good chance you'll wind up relying on Social Security to some degree once your career comes to a close and the steady paycheck that once sustained you goes away. But if you don't educate yourself on Social Security, you could wind up cutting your benefits and hurting financially as a result. Here are three troubling myths about the program you can't afford to believe.
1. My monthly retirement benefit will mimic my former monthly earnings
Some people are under the very erroneous impression that the monthly benefits they collect from Social Security will be similar to what their paychecks looked like. Not so. If you were an average earner, you can expect Social Security to replace about 40% of your pre-retirement income. Most seniors, meanwhile, need close to double that amount to live comfortably and keep up with their expenses.
The takeaway? Don't bank on Social Security alone for retirement. Instead, take steps to build savings, whether in an IRA or 401(k). Socking away $300 a month over 30 years will give you a $340,000 nest egg, assuming your investments generate an average annual 7% return during that time, which is doable if you load up on stocks.
2. If I file early and reduce my benefits, they'll be bumped up once I reach full retirement age
Your Social Security benefits are calculated by averaging your monthly earnings during your 35 highest-paid years on the job and adjusting them for inflation. Once your monthly benefit is established, you're entitled to it upon reaching full retirement age, or FRA. If you were born in 1960 or later, FRA is 67.
Now you are allowed to claim benefits prior to FRA; you can file once you turn 62. But for each month you take benefits early, you reduce them in the process.
Here's the problem, though: Some people think that if they file for Social Security early, their benefits will only be reduced for a few years, and that once FRA kicks in, they'll be bumped up to the full amount their earnings record initially entitled them to. But that's not how Social Security works. Generally speaking, the monthly benefit you start out collecting will be the same amount you receive for life, not including the yearly cost-of-living adjustments that are applied to benefits each year. Therefore, if you file early, expect to collect that reduced benefit indefinitely.
3. I can cancel my benefits anytime and file again later
The Social Security Administration (SSA) allows each filer one do-over in his or her lifetime. If you claim benefits ahead of FRA but regret it after the fact, you can withdraw your application and file again at a later point in time to snag a higher monthly benefit. But you only get one year from the time your benefits start to make that decision, which means that if you wait too long, you'll be stuck with your initial monthly benefit for life.
Furthermore, in order to get that second chance at filing, you'll need to repay the SSA every dollar it sent you in benefits. It's for this reason that so many seniors can't capitalize on the do-over option, and wind up stuck with a reduced monthly benefit throughout retirement.
The more you know about Social Security, the less likely you'll be to fall victim to misinformation that drives you to make bad financial decisions. Even if you're not on the cusp of retiring, it pays to educate yourself on how the program works. It also helps to start thinking about when you'll file for benefits, keeping the above points in mind.