Social Security will probably be a very important source of income for you during your later years. It cannot be yours only source of income, as you will need money in retirement plans to supplement it. Still, your benefits will almost certainly help you pay your bills as a senior once your wages stop.
Unfortunately, even though many retirees rely on Social Security, many Americans don’t even understand one of the most basic rules about how the benefits program works. Worse, it’s not just that Americans don’t understand. The majority are bad about a rule in a way that could cost them many thousands of dollars over their lifetime.
Here’s the Social Security rule that most people get wrong, so you can see if you’re also making a fundamental mistake when it comes to your retirement benefits.
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The basic Social Security rule that many people get wrong has to do with full retirement age (FRA). This is the age you must reach in order to be eligible to claim an unreduced standard benefit. And odds are, you are wrong about when that age is.
That’s because, as a new survey by the Allianz Life Insurance Company of North America revealed, 55% of Americans believe the full retirement age for Social Security is 65. This is simply no true, and it wasn’t for long.
The reality is that FRA varies depending on your year of birth. Here’s what your full retirement age is, based on the age you were born:
If you are assuming that your FRA is 65, as many people do, you may end up reducing your benefits by a substantial amount as a result of this mistaken belief.
So, why are Americans so confused about when FRA is for Social Security? The reality is, it’s easy to make this retirement planning mistake, because the FRA it was 65 when the Social Security benefits program was originally created. It was gradually moved later as a result of reforms in the 1980s that were necessary because Social Security was running out of money.
Since most people are not that familiar with the law changes of the 1980s, and since the latest FRA was introduced slowly, many future retirees simply do not realize that 65 is no longer the critical age. And, of course, it doesn’t help that eligibility for Medicare still starts at 65. It is natural to assume that once you become eligible for Medicare, you will also be eligible for your full Social Security benefit.
The problem is, this misconception has consequences. Each month you claim Social Security before your FRA results in a reduction in benefits. You become eligible to start checks at 62, so if you think your FRA is 65, you may underestimate how much an early claim will reduce your payments.
Oryou can wait until 65, claim your benefit, and not even realize you’re being hit with a two-year early filing penalty that will reduce your benefits by about 13.3%. This is a big problem, since Social Security benefits are protected against inflation and guaranteed to last a lifetime — and cutting them without you knowing can reduce your available income from this important source.
It’s critical that you don’t make this mistake and unexpectedly end up relying more on your 401(k) or other investments than you planned because you’ve reduced your Social Security payments for life. Find out what your current FRA is based on at birth, and make a fully informed claim choice with this correct information in mind.
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Odds Are You’re Wrong About This Basic Social Security Rule was originally published by The Motley Fool
