Social Security is the foundation for many Americans’ retirement plans. However, not everyone knows all of the details of how the government program works. There are a few foundational rules everyone should know, but many Americans’ knowledge falls short for even the most basic and important rules governing the program.

If you don’t know the basics of how Social Security works, making an informed decision about when to claim your retirement benefits becomes impossible. Applying for benefits too early (or too late) can have serious long-term ramifications on your retirement goals. Unfortunately, almost half of Americans maintain an incorrect belief about how claiming benefits early will impact their monthly benefit, according to a recent survey from Nationwide.

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A costly mistaken belief

In the survey, 48% of Americans incorrectly identified the following statement as true: “If I claim benefits early, my benefits will go up automatically when reaching full retirement age.”

Most readers will reach full retirement age at 67 despite becoming eligible to claim Social Security benefits at age 62. But there’s no free lunch when it comes to these benefits. The truth is claiming your benefits before you reach full retirement age will permanently reduce your monthly benefit.

The following table shows just how much less you can expect to receive relative to your full retirement age if you claim early.

For Americans with a full retirement age of 67 (born in 1960 or later).
Table source: Author. Data source: Social Security Administration.

Why is this misunderstanding so prevalent?

There’s a reason why many people may maintain the mistaken belief that you’ll see a bump in benefits upon reaching full retirement age. That’s because sometimes you actually do. But that’s only due to another commonly misunderstood rule: the Social Security earnings test.

The Social Security earnings test says if you earn over a certain amount while collecting retirement benefits before your full retirement age, the Social Security Administration will withhold some of your monthly benefits. The amount withheld is factored back into your monthly benefit once you reach full retirement age. At that point, the earnings test no longer applies, and the SSA no longer withholds any of your benefit.

In this context, the ultimate size of your check is primarily determined by the age at which you initially apply for Social Security. If you never exceed the earnings test threshold in a given year, you’ll never see a change in the amount you collect besides the annual COLA.

Many Americans are unaware of how the Social Security earnings test works as well. Just 56% of survey respondents correctly answered a question about it in Nationwide’s survey.

The earnings test is the exception to the rule, not the rule itself. It’s important to make that distinction to avoid confusion when making a decision about when to claim benefits.

It pays to delay

All things being equal, it’s typically beneficial to wait to claim your benefits, possibly even beyond your full retirement age.

If you opt to wait to claim your benefits, the Social Security Administration will increase your monthly benefit by 2/3 of a percentage point for each month you delay beyond full retirement age. Those delayed retirement credits max out at age 70, which means someone with a full retirement age of 67 can receive a 24% boost to their monthly checks.

A 2019 study from United Income found the majority of seniors (57%) would be better off by waiting until age 70 to claim their retirement benefits. Just 8% would benefit from claiming before age 65.

There are plenty of good reasons to claim early, though.

For one, if the quality of your life with the supplemental income is significantly higher than without, then it probably makes sense to claim it when you need it. There are steps you can take later if your situation improves to mitigate the impact of claiming early.

Another situation is when you have a reasonable expectation that you’ll pass away earlier than your peers. Social Security is designed to pay out roughly the same amount in lifetime benefits for someone living an average life expectancy regardless of when they claim. But if you suffer from a condition that curbs your life expectancy, it might make sense to claim your benefits earlier.

No matter when you decide to claim, be sure you do it with a complete understanding of how your claiming age impacts your monthly benefit and whether or not you should actually expect your benefit to increase in the future.

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