Nearly Half of Americans Are Dead Wrong About Social Security’s Most Important Rule

Many factors go into determining how much retirement income retirees get from Social Security. However, the age when you first start getting payments is one of the most important decisions you’ll make that affects the size of your checks.

Unfortunately, almost half of all Americans are at risk of making this choice without truly understanding the implications. This is according to a new Nationwide survey that revealed millions of people harbor a dangerous belief about how their timeline for claiming benefits will affect their monthly income.

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Americans are making a fundamental — and costly — mistake about Social Security

According to the Nationwide survey, approximately 45% of Americans either believe Social Security benefits will go up automatically after they’ve reached full retirement age (FRA) or they aren’t certain whether benefits will increase at that time.

Here’s how things actually work.

Retirees get the option to start their benefit checks when they’re as young as 62, but each senior has an FRA based on the year they were born. This full retirement age could be as early as 66 and four months for those turning 66 this year. But it could also be as late as age 67 for anyone born in 1960 or later.

Any senior who starts their check before their own designated full retirement age will be hit with early filing penalties. These cause a reduction in the standard benefit each senior is due at FRA. The exact impact of early filing penalties depends on just how soon before FRA someone starts their checks, but a claim at 62 could lead to as much as a 30% reduction in monthly income.

Now, here’s where the big misunderstanding comes in. Close to half of all workers think that if they take a hit to their benefits as a result of an early claim, their reduced benefit won’t be permanent. The Nationwide survey reveals 45% of people believe that once they hit their FRA, Social Security will bump their check back up. And that simply isn’t going to happen.

Here’s why this Social Security mistake can be so damaging

Assuming that the reduction in benefits due to early filing is temporary can be a huge mistake for seniors who may find themselves with far less retirement money than they expected.

Let’s say that you were entitled to a standard benefit of $1,600 at full retirement age but you claim benefits ahead of schedule, starting them at 62 even though your FRA isn’t until 67. The 30% reduction in benefits due to early filing penalties would bring your monthly income down to just $1,120 and you’d miss out on $480 per month, or $5,760 per year.

If you assume you’re just giving up that money until age 67, you may not worry too much about the “temporary” decline in income — especially since you’ll benefit by having money coming in right away. But after you realize you’ll be reducing your benefits for life, that’s a different story.

If you live until 85, shrinking your benefits by $5,760 per year would mean giving up around $103,680 in income you could have received from age 67 to age 85 had you just waited to claim benefits. That’s a big chunk of change.

Of course, you will have received benefits for five extra years if you started your checks at 62 instead of 67. But five years of retirement benefits equaling $1,120 adds up to just $67,200. You’d end up with $36,480 less over your lifetime than if you’d delayed your claim and gotten your full benefit from age 67 to age 85 instead of accepting a reduced benefit for life.

Now, there can be times when starting benefits at 62 does make sense — especially if you’re in poor health and not likely to live very long. But you’ll want to make a fully informed choice about whether this decision is right for you.

You don’t want to start your checks ASAP under the assumption the hit to your benefits is temporary, only to find out later that your monthly Social Security checks will be smaller than they could have been for the entirety of your retirement years.

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