Nearly 9 out of 10 Americans age 65 and older receive Social Security benefits, with an average monthly benefit of $1,825 for retired workers.1 That makes it particularly troubling to consider the numerous misconceptions that exist about the program.
A strategy for claiming Social Security benefits is a key part of retirement planning for clients. When you help clients better understand the program’s purpose and how it works, you’re helping them make informed choices about a vital source of guaranteed retirement income.
Financial professionals can check in with clients to set the record straight on these six worrisome and enduring misunderstandings. It’s an easy way to start a conversation and help them leverage this valuable retirement asset to their advantage.
Myth 1: “Social Security is like a retirement savings account, with only a certain dollar amount I can receive in benefits.”
Help clients understand that Social Security pays a set monthly benefit amount based on a predetermined credits-based formula for eligibility and the amount they receive. There’s not an individual account set aside for each worker’s contributions. Rather, a dedicated payroll tax finances Social Security.2
Recipients who live very long lives can’t outlive their Social Security benefits, and payments don’t stop after recipients have received a certain amount.3
Myth 2: “I have to claim Social Security benefits at age 62.”
Whether a client believes they have to claim at 62, 70 or some age in between, they’ll likely be glad to learn they have a choice.
No one is required to begin receiving Social Security benefits at age 62, but that’s the earliest age they can choose to start receiving benefits if they have worked to earn enough credits by then. It’s important to understand that early benefits are reduced by a small percentage for every month the person is short of full retirement age (FRA), when they can receive 100% of their monthly benefit — and FRA can vary depending on the year a person was born.4
On the other hand, individuals who choose to delay taking benefits can expect to receive increased monthly benefit payments for every month they put it off, up to age 70.4
It can be helpful to remind clients that claiming benefits and retiring are not the same thing. Some clients may choose to claim benefits early and continue to work while receiving payments. Others may put off claiming benefits even after they’ve stopped working and bridge the gap with an income annuity or another option as a source of monthly income.
Myth 3: “My spouse, who was the primary worker, died. I can’t collect benefits based on their work record.”
A survivor doesn’t collect their spouse’s benefit — but certain family members and/or dependents of deceased eligible workers may be able to claim their own benefits. If the deceased person earned enough work credits to be insured under Social Security, some family members may qualify for benefits. Those eligible include:5
- A widow or widower who is age 60 or older, or age 50 or older if disabled
- A widow or widower of any age who is caring for the deceased person’s child if the child is under age 16 or is disabled
- An unmarried child of the deceased who is either under age 18 (or as old as 19 if a full-time student in an elementary or secondary school) or age 18 or older with a disability that started before they turned 22
- A stepchild, grandchild, step-grandchild, or adopted child under specific circumstances
- Parents who are age 62 or older who were dependent on the deceased for half of their support or more
- A surviving divorced spouse under certain circumstances
Myth 4: “The Cost-of-Living Adjustment (COLA) means my benefit goes up every year — and it’s the only way to increase my monthly benefit.”
As explained above, delaying benefits is an important option for individuals who want to increase their monthly benefits payments. And even though we’ve seen some substantial COLAs in recent years, an annual increase isn’t a guarantee.
COLAs protect Social Security benefits from the effects of inflation. COLAs are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) and, in fact, 2009, 2010 and 2015 were years that passed without an annual increase.6
In addition, the Social Security Administration reviews the records of recipients who work, and if the most recent year of earnings is among a recipient’s highest, their benefit will be adjusted.7
Myth 5: “Working in retirement will reduce my Social Security benefit for good.”
It’s not uncommon to receive Social Security retirement or survivor benefits and also work, but benefits are reduced for those who claim before they reach FRA and earn amounts over a certain threshold. But the benefit doesn’t simply disappear forever. Instead, at full retirement age, the benefit amount will increase to account for benefits withheld due to those earnings.7
There is an upper limit to how much a person younger than FRA can earn and still receive benefits, and those who work after reaching full retirement age for benefits can keep their full benefits, no matter how much they earn. In 2023, benefits for those younger than FRA are reduced by $1 for every $2 earned over $21.240.7
Myth 6: “Once I claim my Social Security benefits, I can’t change my mind.”
Recipients have one opportunity to cancel or withdraw their application for benefits up to 12 months after approval. If they’ve already begun receiving benefits, they’ll have to repay that money.8
Recipients who have reached full retirement age but are not yet 70 years of age can also ask to have their benefits payments suspended. This allows them to earn delayed retirement credits for each month payments are suspended — resulting in a higher monthly benefit payment when they resume.9
Help clients plan early and retire with confidence
On average, Social Security benefits make up about 30% of the income of elderly people in the U.S., but more than one in 10 elderly beneficiaries depend on it for 90% or more of their income.1
That can be a risky proposition, and the first step toward mitigating clients’ financial risk in retirement is to set the record straight on Social Security benefits. With a firm grasp on how benefits are earned and calculated, and the factors that can affect payment amounts, clients can better understand how Social Security fits into a larger retirement income strategy that may also include personal savings, pensions, investments and/or annuities.
You can start educating clients about the role of Social Security in their retirement plan with a seminar. It’s a friendly approach — and a great prospecting tool when clients bring guests — that welcomes questions and follow-up conversations. Reach out to your wholesaler today about hosting an educational seminar for your clients.