What comes to mind when you think of Social Security? Chances are, not a whole lot. Or maybe the details are unclear to you. Despite the fact that Social Security benefits are the only guaranteed income most Americans will have in retirement, most of us don't seem to give it too much thought or understand how this valuable benefit works. However, for most Americans, their retirement plans depend crucially on Social Security.

Some people think that Social Security may not even be available to them by the time they retire. A mere 2 in 10 Americans believe they are “very knowledgeable” about Social Security, and considering how many people take advantage of the program, that number should definitely be higher. Fortunately, we have curated the top four misconceptions about Social Security as a way to inform, educate, and empower anyone who may not fully grasp this program.

What is Social Security and what is its purpose?

The first Social Security benefits were received in  January 1940 in response to the Great Depression. The overall goal for this program is to assist older and disabled Americans, and their families, with the cost of living. Over the years, Social Security has provided the “basic level of income in retirement, as well as disability pay and life insurance” for more than 59 million Americans. 

Misconception #1: Social security is going bankrupt and there will be no money for new retirees by 2034

At least 50 percent of Gen Xers, and 51 percent of Millennials, believe that there will be no funds available for them when they become eligible. Since this belief stems from several factors such as longer life spans, declining birth rates, higher costs of living and the fact that baby boomers are retiring at an unprecedented rate, then sure, it seems like this misconception might actually be true. 

While this all may seem foreboding, Social Security will not be completely exhausted by 2034, as some sources will have you believe. Tax income alone,  which is essentially the lifeblood of Social Security, will still be sufficient enough to pay for 79 percent of scheduled benefits.  Furthermore, Congress will eventually have to make some changes to the structure of the Social Security system to sure up the reserve savings for Social Security, referred to as the trust fund. We are firm believers that Social Security is going to be around for the long run, however, we also believe there will be changes to the system.  For example, it is likely that the full retirement age to receive benefits will be moved back for younger workers from its current age of 67.

Misconception #2: Social Security is a retirement account and meant to be enough to provide a comfortable retirement

The purpose of social security is to supply an income floor, supplementing your other streams of retirement income. Yes, every paycheck you receive now shows the amount deducted for FICA taxes (Social Security), but that money isn’t being deposited into an account specifically set aside for you. This money is being paid out to the current retirees taking advantage of their benefits now, which is why it is imperative to take advantage of your employer’s 401(k), 403(b), TSP, pension, etc., or investing into your own separate retirement accounts, such as an IRA or Roth IRA.

While Social Security is an essential piece of most people’s retirement plans, benefits are limited.  Retirees typically receive much less in Social Security benefits than they earned in their working years. So, savings are necessary if retirees are to come close to matching their pre-retirement income. Benefits generally replace about 40% of an average wage earner’s income after retiring. The replacement ratio is less for higher-income workers.

While Social Security is an important component of someone's overall financial plan, it is not meant to be the only replacement for income in retirement.

Misconception #3: You should get social security as soon as you’re eligible

Ultimately, this is your own personal choice, but your decision shouldn’t be made without a full understanding of how Social Security works. The reality is that many retirees, they cannot afford to wait. Since they may not have sufficient savings for retirement, as soon as they are eligible, many will jump on their Social Security benefits. Additionally, since some people still believe Social Security may run out when they still need it, some feel they should start withdrawing their funds as soon as possible. As we have already addressed,  this is not the case.

As for getting your benefits when you are eligible, you are considered eligible at 62, but current retirees won’t reach full retirement age until 66. Getting your Social Security as soon as you’re eligible, or any time prior to your full retirement age, will allow you to get your benefits sooner, but your benefits will be permanently reduced. Alternatively, for every year you delay your benefits from age 66 forward, your monthly payment rises between seven and eight percent until you reach age 70. If you claiming Social Security at the earliest age of 62, you will receive a permanent 25% cut in retirement benefits, compared to full benefits you'd receive at age 66. Claiming at age 70 means you'll receive a 32% boost above your full retirement age amount, which gets you a 76% increase in monthly income compared to claiming at 62. 

Another reason retirees may want to take advantage of their benefits as soon as they’re available is because they don’t want to die before they can use their funds. Well, fortunately as mentioned in misconception #2, life expectancy has risen a great deal over the years due to medical and technological advancements. Whereas in 1940 the average retiree would live an additional 12 to 14 years, in 2015 the average retiree can live an additional 20 years or longer in retirement.

So make your decision based on factors like your target retirement age, and whether you will make that a hard stop retirement date, or you will ease into it and work a little longer. These factors can have a significant impact on your overall "paycheck" in retirement.

Misconception #4: A couple has to be married for 10 years and both must be working in order to take advantage of spousal and survivor benefits

Nope, not true. A married couple has many advantages when it comes to this misunderstood rule. Overall, as a married couple, you may have up to at least four streams of income you can tap into throughout the course of your retirement: your own social security benefits, your spousal benefits, your ex-spousal benefits, and survivor benefits. 

Spousal Benefits

Here are five basic points when it comes to spousal benefits that need to be understood from the start.
  • Even if you never worked, or didn't work enough to earn 40 Social Security credits, you may still be eligible for a spousal benefit.
  • Your spousal benefit is equal to a maximum of 50% of your spouse's benefit.
  • Filing prior to your Full Retirement Age means your spousal benefit is reduced.
  • Your spouse's retirement benefit will not be impacted by your filing for spousal benefits. 
  • You do not receive any delayed credit for waiting to start your spousal benefits beyond your Full Retirement Age, unlike the delayed retirement credits for your own Social Security retirement benefit.

Bonus Points: If you claim Social Security benefits before full retirement age, you can’t select which benefit to receive. You must collect your own reduced retirement benefits first and would receive an additional amount only if your spousal benefit — also reduced for early claiming — were higher than your own. But if you wait until full retirement age, you can restrict your claim to spousal benefits, receiving half of your spouse’s benefit amount, and switch to your own larger benefit at 70. Every couple's financial situation is different, so there is no hard and fast rule when it comes to claiming your Social Security spousal benefits. We recommend speaking with a financial advisor to find out what the right strategy is for you.

Ex-Spousal Benefits

This is where part of the misconception is true. In order to take advantage of your ex-spouse’s benefits, you must have been married for at least 10 years. If you were married for 10+ years, have not re-married, and “the benefit you are entitled to receive based on your own work is less than the benefit you would receive based on your ex-spouse's work,”  then, and only then, can you file for ex-spousal support.

Survivor Benefits

A survivor benefit is worth up to 100% of what the deceased worker was collecting or was entitled to collect at the time of death — assuming the surviving spouse is at least full retirement age at the time of collection. In order for the widowed spouse to take full advantage of this benefit, they must reach full retirement age, which can vary depending on when they were born. However, they can receive reduced benefits as early as 60, and if they are disabled, as soon as 50.

Individuals can also receive surviving divorced spouses' benefits. The ex-spousal 10-year timeline applies for this benefit, however, this is lifted if the individual is caring for a child 16 and younger, or disabled.

Bottom Line

Social Security is an important piece to everyone’s retirement puzzle, but it should not be relied upon as the only source of income in retirement. You also must have adequate personal savings and spend within your means. Furthermore, Social Security isn’t going anywhere. It isn’t some Ponzi scheme that has finally come to a head.  It has continued to serve its purpose for a little more than 80 years now, and it’s up to everyone to stay informed and educated about what’s really going on with Social Security. 

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