Social Security has been paying out benefits to retired workers, the disabled, and eligible family members of deceased workers for more than 75 years, and chances are it could, with a little finesse from lawmakers, continue to pay out benefits for another 75 years or more.
But Social Security isn't easy to understand for the nearly 60 million people currently receiving benefits to understand. According to a survey conducted by KRC Research on behalf of MassMututal Financial Group last year, of the 1,513 people who were asked 10 Social Security questions, just 28% received a passing grade (seven out of 10 answers correct or better), and just a single participant scored a 10 out of 10. Furthermore, prior to taking the quiz, fewer than one in 10 described themselves as being "very knowledgeable" when it comes to Social Security.
Nearly half of all Social Security recipients may regret this move
A lack of education and understanding about the program is one of Social Security's primary shortfalls, and it could also be the cause of Americans' greatest Social Security regret: filing for benefits too early. If eligible recipients don't understand how the benefits structure works, or what choices are available, then it's downright impossible for them to make an informed decision regarding when to file for benefits.
As reported by The New York Times in May 2014, 41% of men and 46% of women apply for Social Security benefits at the earliest possible age of 62. That would mean close to half of the currently 40 million retired workers receiving benefits may have filed for those benefits as soon as possible.
The issue with filing for benefits as soon as possible is that the beneficiary will receive a reduced benefit relative to what they would have received had they waited until their full retirement age, or FRA.
An individual's FRA isn't a static number; it varies based on the year you were born. It is the age at which you're entitled to 100% of your retirement benefits. The FRA for people born between 1943 and 1954 is 66 years of age. For those born between 1955 and 1959, progressively add two months to the FRA per year (thus someone born in 1956 would have an FRA of 66 years, four months). Finally, anyone born in 1960 or later would have an FRA of 67 years. Based on today's FRA and the fact that benefits grow at a rate of 8% per year when left unclaimed, an early filer could wind up receiving as little as 75% of their full benefits if they file at age 62. Those with an FRA of 67 could be looking at a 30% haircut if they file at age 62.
Percentages are one thing, but the message really hits home more when you look at actual dollar amounts. The average monthly benefit paid to retired workers in January 2016 was $1,341. If a retiree's full retirement benefit was the average, and they decided to claim Social Security at age 62, they would instead receive just $1,006 monthly. Those born in 1960 or later (and assuming this on a constant-dollar basis) would get just $939 per month. This means giving up an average of $4,000 to $5,000 per year by filing for benefits early.
A similar study conducted by Nationwide Financial Retirement Institute found a whopping $734 monthly payment difference between individuals who took their money immediately and those who waited as long as possible (age 70). Over a 20-year period of collecting payments, those who waited netted an extra $176,160 in benefits.
Consider your options
It is worth noting that the dynamics of both surveys have changed a bit since they were conducted in 2014. With Congress doing away with the restricted application and file-and-suspend strategies last year, the incentive for married couples to wait until their FRA won't be as strong as it once was.
Additionally, eligible beneficiaries who don't believe they'll live much past their FRA, or who want to put their money to work sooner rather than later, may actually benefit from getting a head start on their payments relative to someone else who plans to wait until their FRA or perhaps all the way until age 70. In some cases filing early may actually be the best choice for some individuals.
However, for others, filing early could mean less retirement income than they envisioned. These individuals should consider a handful of options.
To begin with, if you're still in good health in your early 60s, you might consider working for a few more years. There is no set "retirement age" any longer, and working for a few extra years can have a number of benefits. It'll provide income that you can use to cover your monthly expenses; it'll allow you to hold off on filing for benefits, meaning an 8% increase for each year that you wait until age 70; and it could allow your benefit to grow, as the Social Security Administration averages your 35 highest-earning years when calculating full benefit. This isn't always an option, as our health isn't 100% predictable, but it's a great option for many.
Another option? Form 521 is a "mulligan" for Social Security applicants allowing them to request a withdrawal of their benefits within the first 12 months after filing. In order to qualify, a recipient, as well as any eligible family members who may have received money based on the work history of that recipient, needs to return every cent in benefits paid by the SSA within the first 12 months. Thereby the original filing is undone, and the original recipients' benefits can once again grow by 8% per year. This is a smart move for seniors who decide to pick up a job or who realize their investment and/or retirement portfolios can easily cover their expenses during their retirement.
Everyone's financial situation and needs are different, but it can cost you big-time if you don't understand your options. Don't regret your Social Security decision in your golden years. Educate yourself today on the many options available to you and your family.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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