The rules for collecting Social Security are so confusing, one needs a Master’s in Finance to navigate the ever-changing guidelines. With so many updates and and exceptions, is it any wonder people are bewildered trying to distinguish between fact and myth? Fortunately, there is help.
There are some great online resources to help maneuver through the changes in Social Security and one such resource is The Motley Fool. Dan Caplinger lays out three common Social Security myths, along with the actual facts regarding those myths.
3 Social Security Myths — Debunked!
Many people don’t know that these Social Security “facts” aren’t true.
Many people don’t know as much about Social Security as they should. In fact, many myths have arisen about Social Security that are patently untrue. Below, we’ll take a look at three of the most common Social Security myths, with an eye toward giving you the real information you need to be informed about the retirement program.
Myth 1: You might as well get whatever Social Security benefits you can right away, because if you don’t, you might end up getting nothing at all.
Nearly everyone knows that the Social Security program faces some major financial challenges. Every year, headlines look at the Social Security Trust Fund and talk about how within the next 20 years, it will run out of money. That’s all true, but the conclusion that many people draw is that Social Security benefits will go away at that point, and so it makes sense to grab everything you can right away before the program disappears. That part is not true.
Social Security gets ongoing revenue from the payroll taxes that millions of American workers have withheld from each of their paychecks. In addition to the employee share that’s withheld from your pay, your employer also pays an equal amount of Social Security taxes into the system. That tax revenue covers the lion’s share of Social Security’s obligations, and even as the population ages and there are more retirees collecting benefits compared to the number of workers paying Social Security taxes, it will still cover the majority of the program’s obligations. The Trust Fund will make up the shortfall and cover what payroll taxes don’t — until the current projection of 2034, when the Trust Fund will run out of money.
Yet even after the Social Security Trust Fund is depleted, the payroll tax revenue will still be coming in. According to projections, that should be enough to cover about $0.77 for every $1 of benefits the program owes to recipients. A 23% haircut certainly isn’t good for retirees, but it’s a far cry from getting nothing at all.
Myth 2: There’s a perfect age at which to take your Social Security benefits.
There’s a lot of controversy about when you should take Social Security benefits. You can start as early as age 62, but you’ll receive less in each monthly payment than you would if you wait until full retirement age. Even larger retirement benefit payments are available if you wait beyond full retirement age until you turn 70.
Social Security’s rules create a trade-off in your decision on when to claim benefits. Early claimers receive less — in part because they get a larger number of monthly payments, and the fact that they get paid earlier also makes those payments worth more from the perspective of the time value of money. By contrast, those who take their benefits later get larger amounts each month, and given enough time, that can offset the smaller number of payments they’ll receive because they waited.
Which answer is best for you depends on your individual situation. Those who expect to have greater financial needs later in their retired years will appreciate the larger payments available by waiting. However, those who have immediate financial needs will tend to prefer access to money now, even if it’s less than they’d get if they could wait longer. Moreover, differences in life expectancy can be important, with longer-lived retirees doing better if they delay taking Social Security, while those who don’t expect to reach their full life expectancy arguably reaping bigger rewards by claiming earlier.
Myth 3: Social Security and Medicare both have age 65 as their typical retirement dates.
Most Americans think of 65 as the natural age to retire. Medicare still acknowledges that predilection, allowing Americans to claim healthcare benefits when they reach their 65th birthday. However, Social Security has been gradually boosting its full retirement age, and further increases are coming next year and in the years to come.
For those who turned 62 from 2005 to 2016, full retirement age was 66. However, beginning in 2017, full retirement age for those turning 62 will increase by two months every year. So in 2017, full retirement age is 66 and two months, and in 2018, it rises again to 66 and four months. By 2022, those turning 62 won’t reach full retirement age until 67. That will result in larger reductions in benefits for those who claim early, and it will lead to smaller increases in benefits for those who wait until age 70.
There are many myths about Social Security, and it can be hard to find the truth. By debunking these three myths, however, we hope that you’ll have more information at your disposal to make smart and informed decisions about your Social Security benefits.
About the article author:
Dan Caplinger is a contract writer for The Motley Fool. In addition to his writing, Dan works as an independent financial consultant and estate-planning attorney. Finding that taking one bar exam wasn’t enough punishment, he took three (and passed them all!) and went on to become a CFP (certified financial planner) professional in 2004 before voluntarily relinquished the designation in 2012. Dan focuses on making complex legal and financial concepts easier to understand. His experience in drafting legal documents, administering trusts and estates, and developing personal financial plans all contributes to the content of his articles. Although he generally doesn’t pay attention to conspiracy theories, Dan has a healthy skepticism of the mainstream financial industry. Follow @DanCaplinger
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