Most Americans don’t know what they don’t know about Social Security. A lot of what they think they know is wrong. Since Social Security is a major source of retirement income for many retirees, the lack of information and misinformation can be very costly.
Most Americans believe their Social Security retirement benefits will be enough to live on, according to a recent survey by Zety.com. About 68% of respondents to the survey said they thought the benefits would support them in retirement.
But 40% said they didn’t know how much Social Security would pay them in retirement. Of those who said they had an idea how much their Social Security benefits would be, a plurality of 36% said they would receive $1,000 to $2,000. The average monthly benefit in 2021 is $1,544, according to the Social Security Administration. About 78% of respondent said they’d receive $1,000 or more, with 9% expecting to receive more than $3,000.
Social Security isn’t designed to replace all or most of pre-retirement income, except for the lowest earners. The average Social Security benefit replaces about 40% of pre-retirement income. As one’s income increases, the replacement ratio declines.
There’s clearly a problem when 68% of survey respondents say Social Security benefits will be enough to support them in retirement, but the system wasn’t designed to be the full support for most people.
Another problem is that most people continue to claim their benefits before their full retirement age. That means most people receive a reduced benefit so they can begin receiving benefits early, as early as age 62. Fewer than 10% of people wait to claim their benefits until age 70, when they can claim the maximum benefit.
Surveys of retirees indicate that Social Security benefits become a higher percentage of the income of many households as they age. That’s because they’re spending down other assets and Social Security is indexed for inflation, increasing in amount each year.
As I point out in my book, “Where’s My Money: Secrets to Getting the Most out of Your Social Security,” for many people a nest egg will last longer if Social Security benefits are delayed, even if it means spending other assets first. The lifetime guarantee and inflation indexing of Social Security benefits is very powerful over time.
And in married couples, it’s especially valuable for the higher-earning spouse to wait as long as possible to claim benefits. That ensures the surviving spouse receives as much as possible when there’s only one benefit coming into the household.
Social Security is too important and complicated for people to make decisions based on rules of thumb, media reports, and what their friends are doing. It pays to study the choices carefully, use software to analyze the lifetime results from different claiming strategies, and make the choice with the highest lifetime benefits in your situation.