Most people believe they understand how Social Security works—and they don’t.
Americans know less about Social Security than they think they do. That’s the assessment of California-based Financial Engines, a defined contribution managed account provider that surveyed 1,000 retirees and near-retirees between the ages of 55 and 70. It found 77 percent who have yet to receive Social Security felt confident in their ability to make a good decision.
The survey showed that 73 percent of the people who aren’t receiving Social Security scored a C grade or lower on the quiz. Those with the least amount of assets scored the lowest. Only five percent answered all eight questions correctly.
“What we found overall is people are overconfident of their understanding of Social Security,” says Kelly O’Donnell, First Engines vice president of marketing. “People think they know how it works but when they take a quiz, they scored pretty poorly. This lack of understanding causes many people to underestimate the value of delaying. What we know it does pay to delay, and there are many people leaving significant Social Security money on the table.”
The study found that many people are unaware of their claiming options and that lack of knowledge is costing individuals as much as $100,000 or more and couples $250,000 or more, O’Donnell says.
Two-thirds of Americans take Social Security benefits when they turn 62 or three months of their retirement, and many are unaware of the benefits of waiting, O’Donnell says. By waiting until age 70, the recipients gain a 72 percent increase in benefits throughout their lifetime and gain at 32 percent by waiting for their full retirement age at 66, she says.
“We find most Americans take Social Security as soon as they’re eligible or three months after they retire,” O’Donnell says. “People think of retirement and Social Security as one in the same. What we’re finding is that people should step back and make a separate decision and maybe get some help and better understand before they make their claiming decision because it could make a big impact through the course of their lifetime.”
Social Security provides half to three-quarters of retirement income, and there’s some people whether it’s because of their health or lack of savings and investments, need to take Social Security early, O’Donnell says. The message, however, is that if they can work part-time or access other funds, they can gain at least an eight percent increase by delaying one year, she says.
“Not everyone can delay to 70 but you need to look at your strategy and learn more how Social Security works,” O’Donnell says. “It’s worth it for most people because Americans are leaving money on the table.”
For those with income from a 401(k) or IRA, they can draw from that income first before taking Social Security and bridge the gap that they need, O’Donnell says. Getting an eight percent gain from Social Security in their lifetime benefits for every year of delay and having it adjusted for inflation can’t be beat, she says.
“It’s hard to find that kind of guarantee in terms of returns,” O’Donnell says. “In that age group, they have a more conservative portfolio more about creating income than growth. They traditionally have a lower return than eight percent.”
There are more than 8,000 strategies to claim Social Security benefits when it comes to married couples, which makes it confusing and complicated for people to decide, O’Donnell says. Many don’t know that an ex-spouse can receive benefits based on their spouse. People aren’t aware of “file and suspend” where one spouse files for benefits and doesn’t draw on them but the other spouse can and receives benefits based on them.
In addition, it pays for the spouse with the lower benefit to start receiving benefits before the spouse slated to receive a higher amount. That way when the spouse dies, they can get the highest amount in benefits, but most people don’t think like that, she says.
More than half of those surveyed that haven’t claimed Social Security were more willing to delay taking benefits after learning more about the process of how it works. Some 20 percent say they would wait four years or longer.
O’Donnell says most people would love to have information provided from their employers on how to develop their Social Security strategies. Financial planners say they provide that advise and supervisory people at the Social Security office can help out as well.
Keep checking back here at CompleteSenior.com in the next 30-45 days as we will have developed the most advanced and comprehensive Social Security Report available anywhere online that will show you the best way to receive the most income from Social Security.