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Credit: Keoni Cabral via Flickr.

Earlier this year, independent investment advisory firm Financial Engines commissioned a survey of people approaching retirement. When asked how much they knew about Social Security, more than three-quarters of respondents said they were either very confident or somewhat confident that they had enough knowledge to make a smart choice about when to start collecting their benefits.

To test that supposed knowledge, the survey asked participants eight basic questions about how Social Security works. The results were alarming, as only 5% of the group answered all of the questions right, nearly half got three or more questions wrong, and 14% of respondents outright failed the quiz. 

Social Security Basics You Need to Know

Given how important some of these basic issues are to understanding Social Security and getting the most you can in benefits, it's worth reviewing them:

  • Social Security benefits differ based on how old you are when you claim them. For workers' benefits, the longer you wait between ages 62 and 70, the more you'll get.
  • Survivors benefits are available for spouses regardless of whether a couple had children, and ex-spouses are entitled to the same benefits as current spouses if they were married for 10 years and haven't remarried.
  • Except in limited circumstances, Social Security doesn't offer lump-sum benefits like some pension plans do.
  • Social Security benefits rise automatically from year to year to reflect increases in costs of living.

All of these items can influence the decision of when to claim Social Security, as they all touch on commonly considered factors for retirees. Confusion about the ways in which Social Security differs from other pension plans is especially common.

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Source: Dawn Ellner via Flickr.

The basics of when to take your benefits
The decision of when to start collecting Social Security is one of the most important ones you'll ever make, but there are many misconceptions about your options. In particular, there's a common misunderstanding that you have to take Social Security as soon as you stop working.

It's true that many people simply can't afford not to take Social Security without a paycheck to support them. But there's no legal requirement to do so, and so if you have other savings, then you have the option of delaying Social Security and potentially getting larger monthly checks in the future.

As for the best time to collect those benefits, many believe the correct answer is to do so as soon as possible. That way, you'll get monthly checks for the longest period of time. Although many people understand that the earlier they claim benefits, the smaller their checks will be, but it's hard for many people to put off monthly checks from the government.

Yet only 40% of the survey's respondents made a reasonable estimate of exactly how much their monthly benefits would rise if they delayed Social Security benefits past the earliest possible age. The exact amount varies by age, but you can generally expect to collect roughly 6% to 8% higher payments for every year that you wait beyond age 62, up to a maximum of 76% higher at age 70.

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Source: Social Security Administration.

As the survey points out, life expectancies for both you and your spouse play a vital role in making the best Social Security decision. If you know you're unlikely to have a long retirement, then claiming earlier makes more sense. If you believe you'll live long beyond your life expectancy, waiting is generally the right move. Between those extremes, making the best decision requires you to weigh factors such as availability of outside savings, your ability to work into your traditional retirement years, and your current financial needs.

Don't let overconfidence trick you into thinking you already know everything important about Social Security. By staying aware of the facts, you can make Social Security work its hardest to help provide for your retirement.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days. We Motley Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.