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3 Social Security Misconceptions That Could Cost You Big Time in Retirement

By Katie Brockman - Mar 5, 2020 at 6:02AM

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These myths could affect how much you'll receive in benefits.

Social Security can be a confusing subject, and many people don't fully understand how the program works or how their benefits are calculated. In fact, a whopping 91% of Americans age 50 and older don't know what factors influence the maximum benefit amount they can receive, a survey from Nationwide found.

Understanding at least the basics of Social Security is crucial, though, if you want to ensure you're making the most of your money. Even seemingly harmless misconceptions can lead to major problems, and these three myths can lead to costly mistakes down the road.

Man looking at documents with coins and dollar bills in front of him

Image source: Getty Images.

Myth 1: Social Security is going bankrupt

Nearly three-quarters (71%) of workers are afraid Social Security benefits won't be available to them once they're ready to retire, according to a survey from Wells Fargo. While it's true that the program is on shaky ground, your benefits won't disappear completely.

The Social Security Administration funds retirement benefits using the money that comes in from payroll taxes. However, with baby boomers retiring in droves and living longer lives, there's currently more money flowing out of the system in benefits than coming in from taxes. To avoid cutting benefits, the SSA is tapping its trust funds -- but those funds are expected to run dry by 2035, according to the SSA Board of Trustees' latest estimates. At that point, payroll taxes will only cover about 75% of future benefits.

This means unless Congress steps in to find a solution to the problem before 2035, there's a chance benefits may be reduced. However, as long as workers continue paying their taxes, there will always be at least some money to pay out in benefits.

If you're thinking about claiming benefits as early as possible because you're worried your monthly checks will soon be eliminated, that could end up being a mistake. By claiming early, your benefits will be reduced by up to 30%. Then if benefits are cut again to make up for the cash shortage, you could receive even less. Instead, it may be wiser to delay benefits to earn fatter checks. In the event that benefits are reduced in the future, the extra amount you received by delaying claiming could serve as a cushion.

Myth 2: It's always better to delay claiming benefits

Delaying Social Security benefits is a great strategy not only if you're worried about future benefits being cut, but also if your nest egg isn't as robust as you'd hoped it would be. If you have a full retirement age (FRA) of 67 years old and you wait to claim until age 70, you'll receive your full benefit amount plus an additional 24% per month for the rest of your life.

That said, delaying benefits isn't the right decision for everyone. In some cases, you could actually stand to earn more over a lifetime by claiming earlier than your FRA. For example, if you have health issues or other reason to believe you won't spend many years in retirement, you may be better off claiming earlier so you have extra time to enjoy your money.

In theory, you should still receive roughly the same amount regardless of when you claim. By claiming early, you'll receive smaller checks but more of them. Delay benefits, and you'll collect fewer (but bigger) checks. That assumes, however, that you'll live an average life expectancy. For many people, the break-even age (or the age at which you'll receive more money over a lifetime by delaying benefits rather than claiming early) is somewhere around their late 70s or early 80s. If you don't expect to live that long, it may be a smart move to claim early.

Claiming early can also be a good decision if you have a strong retirement fund and don't necessarily need your monthly checks to make ends meet. By filing for benefits as soon as possible, you can spend more time enjoying your retirement bucket-list activities while you're still relatively young and healthy.

Myth 3: You can claim early and still receive your full benefit amount

One pervasive myth surrounding Social Security benefits is that if you claim early, you'll only receive smaller checks until you reach your FRA. Then once you do reach your FRA, you'll start receiving your full benefit amount.

In reality, however, your benefits will be permanently reduced for the rest of your life if you claim early. Aside from annual cost-of-living adjustments, your benefit amount will stay the same every month throughout the remainder of your retirement. This means it's extra important to start claiming at the best age for your situation. If you claim early banking on the idea that your benefits will increase in a few years, it could potentially throw off the rest of your retirement when you don't start receiving those bigger checks.

Social Security benefits are an important part of your retirement plan, so it's wise to maximize them the best you can. When you can separate fact from fiction, you'll be able to make better decisions and make the most of your monthly checks.

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