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3 Signs You're Thinking About Social Security the Wrong Way

Kailey Fralick, The Motley Fool

Social Security is one of the most universal and crucial parts of Americans' retirement plans. It's also one of the most misunderstood. These misconceptions often cause people to overestimate the income they'll receive from the program while underestimating their personal control over the size of their checks. Here are three signs that you're guilty of misunderstanding the Social Security program.

1. You think Social Security will cover all of your expenses in retirement

Millions of Americans count on Social Security as their primary source of income in retirement, but it was only intended to be a supplement to your personal retirement savings. The Social Security Administration (SSA) states that the program was designed to replace about 40% of pre-retirement income for average earners. It gives no insights into what it considers average earnings, but you can expect it will cover close to this figure for you. High-income households may find it covers less than 40% of their pre-retirement income while low-income households may find it covers more.

Senior Asian woman thinking

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The average Social Security benefit as of July 2019 is $1,472 per month, or $17,664 per year. The Bureau of Labor Statistics estimates that the average household headed by an adult 65 or older currently spends about $50,000 per year. Based on these numbers, the average Social Security benefit won't quite cover 40% of those expenditures, but if there are two people in the household claiming benefits, it could possibly cover more of their annual expenses.

2. You haven't given any thought to when you'll start taking benefits

In addition to overestimating Social Security benefits, many people tend to see their benefits as something beyond their control, a predetermined amount decided by the government. This is somewhat true, but you do have some say over the size of your checks.

The benefit formula calculates how much you're entitled to based on your work record at your full retirement age (FRA). This is not the age you leave the workforce or start taking benefits. It's a government-chosen designation, and it's anywhere from 66 to 67 for today's workers, depending on when they were born. You can start benefits as early as 62 regardless of your FRA, but it'll cost you.

For every month you receive benefits before your FRA, the SSA will dock your checks. If you start at 62, you'll only receive 70% of your scheduled benefit per check if your FRA is 67, or 75% if your FRA is 66. You can also delay benefits past your FRA and your checks will increase until you reach the maximum benefit at 70. That's 124% of your scheduled benefit for an FRA of 67 or 132% for an FRA of 66.

There is no right or wrong answer for claiming Social Security, but there are starting ages that will net you more money than others, depending on your life expectancy. If you want to maximize your benefits, you should figure out which starting age offers the maximum lifetime benefit by multiplying the size of your monthly checks by the number of months you expect to receive benefits based on your estimated life expectancy. Create a my Social Security account to estimate how much you can expect per month if you start at 62, your FRA, or 70.

3. You aren't taking steps now to increase your Social Security checks later

Another consequence of thinking your Social Security checks are wholly determined by the government is that many people fail to take actions while they're still working to increase their future benefit checks. Anything you do today that increases your income will increase your Social Security checks because your benefits are calculated based on your average indexed monthly earnings over your 35 highest-earning years, with adjustments for inflation. 

Working a little extra, pursuing promotions, or switching to a more lucrative field can help you earn more money today and enjoy more Social Security benefits in the future. But only up to a point. Annual income in excess of $132,900 in 2019 is not subject to Social Security tax, so it won't help increase your benefit checks at all.

Make sure you stay in the workforce for at least 35 years if you can. Failing to work for at least that long results in zeros weighing down your benefit calculation, and not working for at least 10 years could leave you ineligible for any benefits.

No matter what you do, Social Security is likely never going to cover all your retirement expenses unless you live extremely frugally. But by understanding how your benefits are calculated and how your decisions affect your checks, you can stretch your benefits a little further.

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