“I recently presented the topic of Social Security to an audience of 50 people, and not one member knew you can take a lump-sum from Social Security,” said Sev Meneshian, a certified financial planner and president of Public Retirement Planners LLC in the Greater Chicago area. “The bottom line is a ton of confusion exists around this topic, because there are a number of ways and strategies to make withdrawals."
“It quickly gets confusing for the general public, not to mention financial advisors,” Meneshian added.
A recent survey by MassMutual Life Insurance showed Meneshian’s experience is not uncommon. Only 28% of respondents received a passing grade when asked basic questions about Social Security benefits — while only 8% consider themselves to be very knowledgeable about those benefits.
Almost everyone surveyed held at least one misperception about Social Security. Also, more than seven out of ten did not realize full Social Security retirement age varies depending on the year you were born in, and 55% did not understand how continuing to work affected their benefits regardless of age.
“If you're still working, don't claim benefits before your ‘full’ retirement age if you can avoid it,” said Jack Hillis, president of Hillis Financial Services in San Jose. “While you're employed, you are increasing the underlying benefit upon which your eventual benefit will be determined.”
Hillis said it’s important to keep in mind reduced benefits will only apply during the years you are working and will not have a permanent effect on benefits you will receive following retirement.
Age limits are another misconception according to Andrew McFadden, a certified financial planner and founder of Panoramic Financial Advice in Fresno, Calif.
“Most people plan on taking social security at 62, the earliest possible age to apply,” said McFadden, who also teaches workshops on Social Security. “Some do this, because they have already retired and have no other way to make ends meet. For most though, they have enough retirement assets or a big enough pension to consider the benefits of delaying their benefit to full retirement age, and possibly to the max age of 70.”
McFadden said most people don't realize the effect of reducing their benefit by 25% or 30%, just to be able to apply at age 62. If they chose to reduce their benefits, that reduction will last the rest of their lives.
“If you make it to age 80, you will collect more benefits from Social Security by delaying to age 70 than any other application age,” McFadden said. “When I ask most people what their goal is when it comes to Social Security, most reply, ‘to maximize my benefits.’ Trouble is, most people aren't pursuing that strategy.”
Surprisingly, Americans remain optimistic about the future of Social Security, with 63% saying they believe Social Security will be there when they retire and a quarter of those saying they strongly hold that belief. However, less than half think the program will have sufficient funding when they retire, and only 39% expect to rely more on Social Security than their personal savings or other income in retirement.
Hillis said it’s wise not to count on the system as your total retirement package. While Social Security is a significant source of income for many Americans, it should still be treated as a supplemental retirement program, he said.
“The other aspects of your retirement plan — funds from defined contribution plans, pensions or personal savings — need to be stronger to compensate,” he added. “To better your chances for a comfortable retirement, don't forget to prepare multiple income sources.”