Social Security benefits can potentially make or break your retirement, and a significant number of retirees depend on their monthly checks just to get by. In fact, roughly half of unmarried beneficiaries and around one in five married couples rely on their benefits for at least 90% of their income, according to the Social Security Administration.
Your benefits aren't designed to be your sole source of income in retirement (they're really only intended to replace around 40% of your pre-retirement income), but if your savings are slim, you might have no choice but to depend on your benefits to make ends meet. Even if you do have a robust retirement fund, it's still smart to maximize your monthly checks.
To make the most of your benefits, it's vital to understand the factors that affect how much you receive each month. But there are several things most people don't know about Social Security benefits, and not having a good grasp on these three concepts could cost you in retirement.
1. Your full retirement age significantly affects your benefit amount
Claiming at your full retirement age (FRA) is the only way to receive the full benefit amount you're entitled to each month. If you were born in 1960 or later, your FRA is age 67. Anyone born before 1960 has a FRA of either 66, or 66 plus a few months. If you claim before you reach your FRA, your benefits will be permanently reduced. On the other hand, if you wait until after your FRA to claim, you'll receive a bonus amount each month in addition to your full benefit amount.
More than two-thirds (68%) of workers over the age of 50 don't know what their FRA is, a survey from Nationwide found, and of those people, 62% believe they're eligible to receive their full benefit amount earlier than they really are. That could explain why a whopping 89% of recent retirees began claiming benefits at age 62 rather than waiting until their FRA to claim, according to the survey.
There's nothing necessarily wrong with claiming benefits early, and it some cases, it might be the best decision. For example, if you have a strong retirement fund and don't expect to rely too much on your benefits, you may be able to afford to claim early even though you'll receive smaller checks. Or if you don't expect to spend decades in retirement, you may be better off claiming early to make the most of your money while you can. However, if you claim early because you're unaware of how it will affect your benefits, you could be in for a rude awakening when you start receiving your checks.
If you have an FRA of age 67 and you begin claiming benefits at age 62, your checks will be reduced by 30%. These reductions are permanent, too. Some retirees (mistakenly) believe that your checks will only be reduced until you reach your FRA, but in reality, you'll receive those smaller checks for the rest of your life if you claim early. That makes it extra important to make sure you know how your benefits will be affected before you decide to claim.
2. You can check your benefit amount online before you begin claiming
A key component of planning for retirement involves estimating your Social Security benefits. When you know approximately how much you expect to receive each month in benefits, you can determine how much you'll need to save on your own to cover all your retirement expenses.
However, most people don't know how much they'll receive from Social Security before they claim -- even though there's a super simple way to find out. By creating a my Social Security account, you can access your statements online and get an estimate of how much you'll receive in benefits based on your real earnings. Although it only takes a few minutes, 57% of Americans have not logged in and checked their statements, according to the SSA.
Because Social Security benefits are such an integral part of retirement for many people, having a good idea of how much you expect to receive each month can make planning for the future much easier. It can also help you figure out whether you should claim at your FRA, claim early, or delay benefits. Your Social Security statements will give you an estimate of what you're expected to receive if you claim at your FRA, and if that's less than you expected, you might choose to delay benefits to earn extra cash each month. But if you check your statements and find you're expected to receive a healthy amount in benefits, you might be able to afford to claim early.
Knowing all this information can help you decide when is the right age to claim, and it can also make it easier to determine how much you'll need to save on your own to bridge the gap between what Social Security will provide and how much you need to make ends meet in retirement.
3. There are multiple factors that determine your benefit amount
A whopping 91% of workers age 50 and older say they don't know how their benefits are calculated, a survey from Nationwide found. While you don't need to know every single detail about how your benefits are calculated, having at least a basic understanding of the factors that affect your benefit amount is important if you want to maximize your checks as much as possible.
Your FRA is a big one, so make sure you know what yours is as well as how the age you claim will affect your benefit amount. Another important factor is how many years you work. Your full benefit amount (or the amount you'll receive if you claim at your FRA) is based on an average of your 35 highest-earning working years. If you work fewer than 35 years, your benefits will be lower because you'll have zeros factored into your average. But if you work more than 35 years, you can increase your benefit amount by replacing some of your lower-earning years (probably from early in your career) with more recent higher-earning years.
You may also be eligible for other types of Social Security checks in addition to your regular retirement benefits, such as spousal benefits or divorce benefits. The SSA won't typically notify you when you're eligible for these types of benefits, so it's up to you to research what you're entitled to so you know when to start claiming.
Social Security benefits can be confusing, but if you want to ensure you're making the most of them, it's crucial to understand them the best you can. By making the best financial decisions for your unique situation, you can maximize your benefits and enjoy a more comfortable retirement.