Social Security is one of the most widely used federal programs, providing 64 million Americans -- about one out of five -- with a basic income. You will be claiming your own share one day, so make sure you're prepared when the time comes. Read on for the three most important facts you should know about Social Security.
1. Social Security benefits are a major source of income for most senior citizens
For one, Social Security benefits are crucial as they are adjusted for inflation every year. This means that the purchasing power of your Social Security benefits will stay the same, while your savings will likely lose purchasing power each year.
One of the greatest challenges of retirement is the loss of earned income. You have to live on your savings, your investments, and your Social Security benefits for the rest of your life, which can be a long time. The average 62-year-old male is expected to live another 20 years, while the average 62-year-old female will live another 22 years. That's nearly half most peoples' working lives. For 36% of senior citizens, Social Security benefits provide 90% or more of their income, and the program pulls an estimated 14 million elderly Americans out of poverty, according to the Center on Budget and Policy Priorities.
You may think you won't fall into that 36%, but Social Security is the main source of income for most elderly Americans. For 65% of senior citizens, Social Security provides over 50% of their income.
2. You can earn more from Social Security by claiming later
Your "primary insurance amount" is the benefit you will receive each month if you claim Social Security at your "full retirement age." For Social Security's purposes, full retirement age is 66 for those born in 1954 or earlier, and it moves up two months for every year thereafter until hitting 67 for those born in 1960 or later.
You can claim Social Security as early as age 62. However, if your full retirement age is 66, your monthly benefits will be 25% lower than your primary insurance amount if you claim at age 62. For every month you wait to claim Social Security after age 62, your benefits increase by about 0.5% until your hit your full retirement age. For every month you wait to claim after your full retirement age, up until age 70, your benefit increases by two-thirds of 1%, or about 8% per year.
By claiming at age 62, you do get four extra years of checks. However, that 25% reduction takes its toll over the years. For the 65% of Americans who live to at least age 78, waiting until full retirement age to claim Social Security will earn them more in lifetime benefits. While only 6% of Americans wait past full retirement age to claim Social Security benefits, if you expect to live past age 78, it can make sense to do so.
The graph below gives you an idea of how much you can receive in lifetime benefits based on when you start collecting them. As you can see, the later you claim benefits, the more you can earn in cumulative benefits -- if you live long enough to pass the breakeven point.
There are all sorts of other Social Security strategies to consider if you are or were married. But the important thing is that you educate yourself on the best decision for your own retirement.
3. Social Security will be there for you when you need it
While there are all sorts of reports saying that the Social Security trust fund is running out and the program is doomed, you can rest assured that your benefits will be there for you in retirement.
While the current estimate is that Social Security's assets will be depleted by 2034, there will still be money entering the system from those who are working. The Social Security Trustees annual report estimates that the Social Security Administration will still be able to pay 75% of the benefits owed -- and that's assuming that Congress does nothing in the intervening years to fix the problem. You can assume that with one out of every five Americans receiving benefits, Congress will come up with a solution by then -- even if it's short-term in nature.
The bottom line on Social Security benefits
Social Security is one of the most important federal programs for the financial security of elderly Americans. Make sure you educate yourself on the ins and outs of Social Security so you can make an informed decision when you're ready to start collecting benefits.
Dan Dzombak plans on living to 200 and taking Social Security at the latest age possible to claim. He is a long-term investor and writes about happiness. Try any of our Foolish newsletter services free for 30 days. We 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.