Social Security is a cornerstone of financial security for millions of Americans, providing a steady income stream throughout retirement. Over 70 million Americans receive benefits from the program, which is only set to grow yearly.
However, navigating the program’s intricacies can be tricky. Things can get complicated very quickly.
For this reason, many common myths surround Social Security benefits. Unfortunately, some of these misconceptions can lead to costly decisions.
One such misconception is that claiming Social Security benefits as soon as possible maximizes your overall payout. While this may lead to more money in your pocket occasionally, for the average person, this isn’t the best choice! We’ll debunk this myth below and talk about when you should claim Social Security.
We’ll also discuss the importance of understanding enrollment procedures. You do not automatically receive Social Security, and signing up correctly is important to ensuring you receive benefits.
Why Does It Matter?
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Fully understanding how Social Security works is vital for maximizing Social Security benefits. Otherwise, you may leave money on the table. In most cases, you can’t redo retirement once you initiate it, so making the right decision the first time is important.
Myth #1: Claiming Social Security as Soon as Possible Maximizes Benefits
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The allure of extra money in your pocket can be strong. Social Security allows you to claim retirement benefits as early as age 62. However, this probably isn’t the best age to claim for the average person.
It’s important to understand the Full Retirement Age (FRA), which is the age at which you can begin receiving full benefits. It varies slightly based on your birth year, but it’s typically 66 or 67.
Social Security does allow individuals to start claiming at 62 to allow for flexibility. Some people cannot continue working to FRA, for instance. Sadly, some people have interpreted this flexibility to mean that everyone should start receiving benefits as early as possible. Receiving benefits for longer may sound like it maximizes your income, but it doesn’t.
Here’s why: Social Security benefits are calculated based on your average monthly earnings throughout your highest-earning 35 working years. In other words, your 35 highest-earning years are averaged together, and that results in the amount of Social Security you receive if you retire at your FRA.
If you decide to retire at 62, your benefits are greatly reduced. The Social Secuirty Administration lowers your monthly benefit to spread the same amount of money over fewer years. Therefore, you aren’t receiving more money. You’re just receiving the same amount over a longer period.
Furthermore, the last years of someone’s career are typically the highest-earning ones. If you work fewer years overall, you can potentially lower your benefit even further.
Let’s look at a hypothetical example. Let’s say Sarah reaches her FRA at 67 and has an average monthly earning of $4,000 (based on her 35 highest earning years, of course). If Sarah waits until 67 to claim benefits, she will receive $1,581, according to the SSA’s benefits calculator.
However, if she retired early, her monthly check would reduce to $1,200.
Strategic Delay: Maximizing Your Monthly Benefit
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While claiming early may seem appealing, delaying benefits past your Full Retirement Age is also advantageous. When you delay past your FRA, your monthly payout is increased. This strategy leverages “delayed retirement credits.”
Simply put, for each month you delay claiming benefits past your FRA, your monthly benefit is increased by a specific percentage. It starts out small, but then the percentage increases exponentially as you approach 70.
Your benefits are maxed out after age 70, so there is no reason to delay past that point.
Let’s revisit Sarah. If she decides to delay claiming benefits until she is 70, she will earn delayed retirement credits for 36 months. This would increase her monthly benefit to $2,046.
That said, 70 isn’t always the best time to claim benefits, either. We have a whole article on why age 70 is not the best time to claim Social Security for a complete explanation of how the math works. But it basically comes down to life expectancy. If you don’t like long enough to recoup the lost income from all those months of delaying, you may get less money overall.
For the average person, claiming sometime around FRA is the best choice.
Myth #2: You Will Automatically Enroll in Social Security
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Another common misconception is that Social Security enrollment happens automatically. After all, you’ve been paying Social Security taxes!
In some cases, your employer will take care of enrolling you for Social Security on your retirement date. However, this isn’t true for all employers, and it doesn’t work for self-employed people.
Either way, it’s important to remember that you are responsible for applying for Social Security benefits when you’re ready to claim them. Even if your employer offers a helping hand, staying on top of the process and ensuring all their information is correct is important. At the end of the day, it’s on you.
Luckily, applying for Social Security is pretty straightforward. You can apply online, by phone, or in person at your local Social Security office. We even have an article on how to apply for Social Security benefits that provides step-by-step directions.
It’s generally recommended to start the process four months before you want your benefits to start.
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