Government programs are often very confusing. Social Security is no exception. In the same way that filing your taxes is complicated and burdensome, signing up for Social Security — or considering deferring until later — is a bamboozling prospect. Even if you look for simplified explanations or seek professional help, you can end up with more questions than answers.
Many people, even as they approach retirement age, are woefully unprepared or ignorant of the Social Security system. Sure, they might know how it works on a very basic level. But as far as devising a strategy and using the system to their benefit? Most of us are probably willing to let the chips fall where they may and take whatever we get.
Why is that, though? Why don’t we know anything about the Social Security system? There’s no easy answer. It’s most likely a combination of the system’s complexities, the incredible degree to which benefits differ from one person to the next, and the mind-numbing minutiae that go into studying it at a deeper level. For these reasons and more, there are still many myths and misconceptions about Social Security among the American populace.
A new survey from Fidelity exposes many of those misconceptions and helps give us a little understanding as to why there’s so much confusion.
“Social Security-related decisions can be complex, with a number of trade-offs associated with the various payment strategies. This decision can be challenging and may be dependent upon several factors, including one’s financial situation, health and lifestyle considerations and the needs of your immediate family,” said Ken Hevert, senior vice president of Retirement at Fidelity.
“However, with some basic guidance and a sound retirement plan in place, it’s much easier to make an informed decision and get the most out of your benefits,” he continued.
Drawing from the survey, let’s take a closer look at some of the most confusing elements of the Social Security system
1. The early bird gets the least
One of the biggest misconceptions about Social Security is you need to get in early — that is sign up as soon as you’re eligible at age 62. This is one of the “myths” specifically pointed out by the Fidelity team. Although there might be reasons why you want to claim early, it’s typically better to wait because your benefits will be bigger.
“For those born in 1960 or later, the full retirement age is 67,” the Fidelity team said. “While the right time to take Social Security benefits can be dependent on your financial status, health and lifestyle considerations, and the needs of your immediate family, if you can wait until your full retirement age, your monthly Social Security income may increase by as much as 30 percent.”
2. Your last year of employment
If you’re nearing retirement, you might not know what to expect. And you might feel like your last year of employment — and what you’re earning during that year — plays a bigger role than it actually does. But this isn’t true. There are many factors that will determine how much you end up receiving after you retire. “Your benefit is calculated based on your highest 35 years of earnings; they do not have to be consecutive years or before age 65,” Fidelity said.
You can also use Fidelity’s calculator to get a better idea of what you can expect.
3. No mulligans
If you opt to claim early, can you change your mind later to get a bigger check? Or, in other words, can you change your strategy? Unfortunately, no — once you make a choice, you’re stuck with it.
“Some people believe they can claim early at age 62, and when they reach 66 or older, their payments will increase to the amount corresponding to their full retirement age benefits, but that’s simply not the case,” Fidelity said. “The fact is, there’s no income ‘bumping’ once you’ve claimed your Social Security retirement benefits — and the decision cannot be altered.”
4. When do you need to apply?
Will checks magically materialize in your mailbox? Well, no. You’ll need to make the first move. Specifically, you’ll need to apply three months before you want to get that first check. If you overlook that three-month gap, you might be without any income for a brief period. “You need to apply for Social Security three months before the first payment. The Social Security Administration will not contact you when it’s time to receive benefits,” Fidelity said.
5. Exes and zeros
Millions of Americans have been divorced. That can lead to some questions regarding whether an ex is entitled to some of your benefits. In fact, they might be. “Those who were married for 10 consecutive years and haven’t remarried are entitled to either their own benefits or 50 percent of the former spouse’s benefits, whichever is higher — once FRA is reached,” Fidelity said.
6. Attitudes toward Social Security shift with the economy
It’s important to remember the economy is always changing, as are our attitudes about our finances. We might feel good about retirement right now, but if the economy sours, that can quickly melt your enthusiasm. Your attitude can and will impact your post-retirement Social Security strategy. For example, we know fewer people are signing up early now than were back when the economy was experiencing more turbulence.
“This year, only 28 percent of those aged 61 are planning to claim Social Security benefits as early as possible, which represents a significant decline from 2008, when nearly half (45 percent) of those surveyed were planning to start collecting immediately,” Fidelity said.
7. Do you know how big your check will be?
We know there are numerous factors that ultimately shape your Social Security checks. But few of us really have a good sense of what we’ll be getting. “When asked to state how much their expected Social Security payments would be, only 14 percent of pre-retirees knew how much, and nearly twice as many (26 percent) had no idea,” Fidelity said. Again, you can use calculators, or ask a professional to help you figure it all out.
8. Health and lifestyle
Your overall health and lifestyle should also be taken into consideration when trying to decide how early or late you want to sign up for benefits. If you’re battling health issues that put you out of work sooner, it might be beneficial to sign up at 62 rather than try to hold out until 67, for example. This can be tough to gauge. But for some people, signing up early is the best way to make sure you’re making the most of your benefits.
9. Beliefs about contribution limits
Fidelity also shared this statistic with us: 31% of those asked believe if they work past age 65 their benefit will still only be based on contributions up to age 65. This isn’t necessarily true. As we’ve discussed, the calculation takes into account your highest-earning years. And those can come after age 65. Even so, it appears roughly a third of Americans are confused about post-65 earnings.
10. Will you get your money back?
You pay into the system your whole working life. And it’s only fair you’d see all that money returned. Fidelity also shared this with The Cheat Sheet: 56% believed most people will never get back all the money they put in the Social Security system. So will you get your money back? It’s hard to say. But some calculations show you might end up paying more over the course of your life than you get back. Ultimately, it’ll depend on how long you’re drawing checks, how old you were when you signed up, and how much you paid in.