5 Social Security Myths That Can Cost You Thousands

Seniors are making some surprising retirement mistakes, and misconceptions about Social Security are driving those errors.

Social Security is a critical income source for seniors, but it's also a really complicated program. Unfortunately, when current and future retirees don't understand it, their finances suffer.

To make sure you don't put your financial security at risk, check out these five Social Security myths that could cost you thousands.

Benefits are running out, so you should claim ASAP

One of the biggest myths that far too many Americans have bought into is the myth that Social Security is going broke. In fact, 70% of Americans responding to a Cato Institute survey believe benefits will be cut before their retirement age, and 30% think there will be no benefits at all by their retirement.

Unfortunately, many Americans panic at these fears and end up making bad choices because of them. In fact, the Center for Retirement Research found that frightening headlines about Social Security's financial troubles caused future retirees to claim between six months and a full year earlier than originally planned.

An earlier claim costs retirees. Each month you claim before full retirement age leads to an early filing penalty. Those penalties add up to a 6.7% cut for each of the first three years and a 5% cut for any prior year that you get benefits before your FRA. A claim at 62 with an FRA of 67 ends up cutting 30% off your benefits for life.

Benefits are recalculated at FRA if you claim early

Research from Nationwide Financial revealed that almost half of all Gen Xers and millennials, and almost seven in 10 baby boomers, believe that when they claim benefits early, their benefit checks will be recalculated and increased at full retirement age.

Unfortunately, this misconception could also prompt a claim at an earlier age, with some retirees even opting to claim at the earliest possible age of 62. After all, why not claim ASAP if the reduction in benefits that comes with an early claim is temporary?

That reduction isn't temporary, though. It's permanent. If you shrink your benefits, it's for life. That means if you had been on track for a $2,000 benefit at your FRA of 67 but claimed it at 62 instead, you would have a $1,400 payment each month instead.

Future Cost of Living Adjustments will increase this amount over time, but COLAs are percentage-based, so each raise will also be smaller than if you'd waited.

Full retirement age is 65

There's another misconception that could cause you to make an earlier-than-anticipated claim.

According to research from Allianz Life, 55% of Americans believe 65 is the full retirement age for Social Security. But that's not the case for anyone born after 1942. For anyone born after that time, FRA is between 66 and 67.

If your FRA is 67 and you claim at 65, you get hit with two years of early filing penalties, so you face around a 13.4% reduction in benefits. Again, this is permanent. If you were supposed to get a $2,000 standard benefit at FRA, that comes down to just $1,732 under this scenario. You'll lose out on $268 each month for life.

Waiting to claim benefits until 70 is always a good thing

Now, there are also some myths on the flip side of the equation.

Specifically, if you've been listening to experts, you've probably heard that waiting until 70 is the best plan for claiming benefits. After all, you can earn delayed retirement credits for each year you wait for benefits between FRA and 70, and these credits add up to an 8% per year boost or a 24% total increase if your FRA is 67.

The reality, of course, is that claiming at 70 is best for most people. But most people doesn't mean everyone. There are a few scenarios when waiting could cost you, including:

• If you're single and in poor health. You could die before breaking even for a delayed claim, and you wouldn't have a survivor to get benefits on your work record.
• You were the lower earner, and your early claim enables a higher-earning spouse to wait. This coordinated approach often plays out best for married couples.
• You're claiming spousal benefits. Those don't increase after FRA.

In these scenarios, a delayed claim could leave you with fewer total lifetime benefits. You need to avoid buying into the myth that waiting is always best and consider your personal situation.

A big COLA is good for retirees

Finally, many retirees believe a big COLA is good news because it means they're getting a larger raise.

It really isn't, though. COLAs are calculated based on a measure of inflation, so the bigger the raise, the more prices are surging. Since you probably have other income outside of Social Security, which doesn't automatically increase to keep pace with inflation, that's not a good thing.

If you see a big COLA coming, don't get excited or adjust your budget up. Instead, start planning for careful spending due to price increases on most products.

Bottom line

Understanding the truth about Social Security can help you confirm if you're on track for retirement by shedding light on how much income the benefits program is likely to provide you.

Be sure you learn the details about how Social Security works and what your benefits will be at different ages, so you can make a truly informed choice about how to maximize this critical income source as a senior.