Social Security is one of the primary sources of income for most retirees -- yet the majority of Americans are pretty clueless about exactly how Social Security benefits work. Unfortunately, missing out on some fundamental knowledge about the Social Security program could end up affecting how much you're able to receive in benefits. You don't want to inadvertently cut your Social Security income or make choices based on incomplete info, so it's important you find out the basics.
In particular, there are three essential facts that future retirees need to know -- but don't. According to a Nationwide survey, 76% of older adults don't know what their full retirement age is; 52% don't know that Social Security provides income for life; and 60% don't know that Social Security is protected against inflation. You no longer have to be one of the majority of Americans who don't know these key facts, as you can read in detail below about how this essential information affects you.
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What is full retirement age, and why does it matter?
When you claim benefits, the age at which you start receiving Social Security affects the amount of income you'll get.
- If you claim at the age deemed your full retirement age, you'll receive your primary insurance benefit. Your primary benefit amount is calculated based on your average wages over your highest 35 years of work, adjusted for inflation. If you retire before your FRA, the primary benefit you'd otherwise receive is reduced by 5/9 of 1% for each of the first 36 months early, and by an additional 5/12 of 1% for each additional month before your FRA that you receive benefits.
- Claiming after your FRA, on the other hand, can result in earning delayed retirement credits that increase the monthly benefit you get by 2/3 of 1% per month for each month you delay until age 70.
Full retirement age varies depending on your birth year, but retiring either before or after it can have a huge impact on your benefits. A person who retires at 62 instead of a full retirement age of 67 will see a 30% reduction in monthly benefits, for example. And the reduction or increase in benefits affects you for the entirety of retirement -- if you claim early, benefits don't go up once you hit your FRA.
The chart below will show you what your FRA is so you'll know when you can retire with full benefits -- and you can also check out this chart to see how claiming early could potentially affect your income. Knowing your full retirement age -- along with how retiring earlier or later will affect your benefits -- can help you make a fully informed choice about the best age to start receiving Social Security.
Full Retirement Age
66 and 2 months
66 and 4 months
66 and 6 months
66 and 8 months
66 and 10 months
1960 and later
Source: Social Security Administration.
Social Security's lifetime income promise
From the time you start claiming benefits, Social Security will provide you with income for the rest of your life.
Because you're guaranteed income until you die, Stanford experts recommend waiting to claim Social Security until age 70 so you can maximize your benefits. Stanford researcher ran an assessment of 292 different strategies for generating retirement income and found Social Security to be "close to the perfect retirement income generator." Because it protects against longevity and inflation and minimizes your tax burden, since part or all of your benefits aren't taxed, maximizing your monthly benefit was found to be the smartest approach.
If you maximize your Social Security income, the benefits of doing so can even extend until after your death. When one spouse dies, the surviving spouse can choose to either keep his or her own benefits or claim survivor's benefits. If you were the higher-earning spouse and maximized your Social Security by waiting until 70 to claim, survivor's benefits will be worth more than if you'd claimed earlier. This higher benefit could go to your surviving spouse for the rest of his or her life. This could help you to keep your beloved out of poverty after you're gone.
How Social Security is protected against inflation
Finally, Social Security benefits are also protected against inflation because of Cost-of-Living adjustments. Each year, the Social Security Administration looks at an index called the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) to see if prices have risen. If so, benefits recipients get an annual COLA. The table below shows the annual COLA adjustments for Social Security beneficiaries in recent years.
|Year||Cost of Living Adjustment|
There's convincing evidence to suggest Social Security benefits aren't actually increasing as much as they should, because they're tied to the wrong index to determine inflation -- after all, seniors aren't urban wage earners or clerical workers. Still, you get some measure of protection against rising prices from COLAs, which is another reason Stanford experts believe delaying benefits to maximize Social Security is important. Your Cost-of-Living adjustments are based on the starting amount of benefits you receive, so if you reduce your benefits by claiming early, all raises going forward will also be smaller.
Making informed decisions about Social Security
Knowing the basics about Social Security can help you decide when to claim benefits and how your benefits will affect your lifetime income. There's a lot more to know, including exactly how benefits are calculated. Make sure to do lots of research prior to claiming Social Security benefits, as undoing a claim can be difficult or impossible once you've started receiving income. Read our Social Security guide to get informed, or consider talking with a financial advisor who can provide the insight you need. This is one area where you can't afford mistakes, so take the time to get the right info before you submit your benefits claim.
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