Investors have many misconceptions about retirement, but one area easily with the most misconceptions is Social Security benefits. In a recent survey, MassMutual used a true/false quiz to test near-retirees ages 55 to 65 on their knowledge of Social Security. About 53 percent of respondents earned a D or lower on the test.
The good news is that most understood that benefits claimed before full retirement age would be reduced; however, 26 percent did not know what full retirement age was. Full retirement age has been a moving target for many years, mostly because of our increased longevity and the improved health of older people. If you were born in 1960 or later, your full retirement age is 67, but that is subject to an increase by Congress. Those born between 1943 and 1959 are generally in the 66 age bracket, plus a couple of months. While everyone is eligible for Social Security benefits at age 62, the permanent reduction could be as much as 30 percent, depending on your full retirement age. Most survey respondents also knew that delaying the receipt of benefits until age 70 would increase the compensation.
While some investors think that the deduction or increase in benefits influences when they should apply, the truth is that it depends on multiple other factors in your life and financial plan. The decision to begin receiving Social Security is unique to your situation considering your age, if you are still working, your health, and other assets you may have available for living expenses.
Despite the reduced benefit, there are plenty of situations when an investor may find it favorable to start benefits before full retirement age, allowing invested retirement funds to continue to grow. I always recommend investing money you need for living expenses for the next 10 years in fixed-income investments that mature when you need the funds. However, if that need can be fulfilled by your Social Security benefit — even at the reduced rate — it may be advantageous to let your invested retirement money continue to grow. Planning is essential so that you know how Social Security will fit into your retirement cash flow.
One of the other widely believed misconceptions is that a recipient’s benefit will never change. Social Security benefits may be subject to income tax, depending on your other income. Benefits can also be reduced if you owe back taxes or student loans. Higher income in some years may trigger a higher Medicare premium, which is taken from your Social Security benefit. Compensation may also be increased because of a cost-of-living adjustment. Overall, your benefit can fluctuate from year to year—another good reason to work with an adviser to understand how Social Security will fit into your financial plan.
One final misconception I’ll touch on is that your benefits cannot be reduced if someone else can claim a benefit based on your work record. The Social Security Administration will always pay you what you are eligible for. Spousal or dependent benefits will not affect how much you receive; therefore, there is no need to panic when you find that your ex-spouse may be collecting based on your work record.
Navigating Social Security benefits is complicated and very specific to your situation. It is nearly impossible to provide general advice that applies to everyone. If you work with a financial adviser, you’ll likely explore several different scenarios when it comes to when you should choose to begin receiving your benefits.