Your choice about when you claim Social Security retirement benefits shapes the amount of income you have throughout your later years.

Unfortunately, millions of Americans, including nearly 7 in 10 of those closest to retirement, are laboring under a dangerous misconception that could lead to the wrong choice. Here's what it is.

Social Security card with money sitting on top of it.

Image source: Getty Images.

Americans don't understand the truth about this key Social Security rule 

According to recent research from Nationwide Financial, 45% of millennials, 49% of Gen Xers, and 69% of baby boomers believe if they claim their benefits early, the amount be recalculated at full retirement age and their checks will increase. This is simply not true.

When you file for Social Security benefits prior to FRA -- which is based on birth year and is between 66 and 67 -- you're subject to early claiming penalties. For each of the first three years ahead of FRA, they'll shrink your checks by 5/9 of 1% per month. Those who start their benefits even earlier face an additional penalty of 5/12 of 1% per month. While the math is complicated, the bottom line is you reduce benefits by 6.7% per year for each of the first three and an additional 5% for any prior year.

When you incur an early filing penalty, your benefit isn't recalculated at FRA to eliminate it -- your benefits are permanently reduced. For those who claim at 62 with a full retirement age of 66, benefits will be 25% smaller. If you'd have received the average $1,503 benefit, you would instead get $1,127 per month.

And while all retirees get periodic cost-of-living adjustments to help benefits keep pace with inflation, those COLAs won't catch you back up to where you'd have been if you hadn't claimed early. In fact, they're based on a percentage of your average benefit so all future raises will be smaller, too, since you're starting with a lower base amount. 

You can avoid this costly mistake

When you know the truth about how early filing affects your benefit amount, you can make an informed choice about whether you're willing to accept a permanent reduction in benefits.

While claiming early due to the misconception your benefits will be recalculated is sure to leave you disappointed, there are situations when filing for Social Security ASAP makes good sense. If you're worried you won't live very long, for example, getting more checks early on may maximize your lifetime benefits even if each check is smaller. But you need to make your decision after you have the facts.

If you've already claimed benefits ahead of your FRA under the mistaken assumption they'll be recalculated and you'll get higher checks later, you may have a few options for fixing the problem.

If it's been less than 12 months since you filed for benefits, you could withdraw your claim -- but would have to pay back all the money you've received so far. If not financially infeasible, taking this step would serve as a reset and it would be as if your early claim never happened.

You could also work enough to stop your benefit, as earning wages above an annual threshold will result in a forfeiture of some benefits if you haven't yet hit your FRA. When benefits are withheld because of higher earnings, a recalculation does happen at your FRA and you receive higher future checks to make up for the missed benefits.

Neither of these options works for everyone, though, so it's best to make the right choice about when to claim from the start. Now you can do that since you won't be one of the millions of Americans who doesn't understand the implications of your choice.