Image source: Getty Images.
Continue Reading Below
Social Security is arguably the most important social program in the United States. According to the Center on Budget and Policy Priorities, the poverty rate for retirees is just 8.5% thanks to the income provided by Social Security. If that income wasn't available, the CBPP predicts that the poverty rate for elderly Americans would be just north of 40%.
Furthermore, retirees and baby boomers who are nearing retirement freely admit that they either rely heavily, or plan to lean significantly, on Social Security income. Recent Social Security Administration data found that 61% of beneficiaries rely on Social Security for at least half of their monthly income, while statistics from the Insured Retirement Institute showed that 59% of baby boomers are expecting Social Security to be a "major" source of retirement income.
Yet in spite of the importance of Social Security, most people lack the knowledge of the program that's needed to make smart claiming decisions. If you make a hasty decision as to when you'll start taking benefits, it could wind up costing thousands, tens of thousands, and in rarer cases, hundreds of thousands of dollars over your lifetime.
Can you pass this Social Security quiz?
How do you know if you have the Social Security know-how to make an informed decision? Simple. See if you can pass the following Social Security quiz I've prepared. This answers to this 10-question quiz are "True" or "False," and while some questions might seem harder than others on the surface, they're all pertinent to getting the most out of the program over your lifetime.
Continue Reading Below
Image source: Getty Images.
Let's begin by asking the questions, and below we'll begin reviewing the correct answers (to keep you from eye-scrolling and cheating). Remember, these are all "True" or "False" questions.
1. I automatically qualify for Social Security benefits.
2. My Social Security benefit grows by 5% for every year that I wait.
3. My full retirement age is based on the year I was born.
4. Waiting as long as possible to start benefits is always the best move.
5. Suspend-and-file is one of the best strategies my spouse and I have available.
6. There is a minimum Social Security benefit of $500 a month.
7. There is a maximum Social Security benefit.
8. My Social Security benefits aren't taxable.
9. While important for all seniors, Social Security is more important for women.
10. Social Security is going bankrupt and won't be there for me when I retire.
Did you pass?
Have your answers written down? Let's look at how you did.
1. I automatically qualify for Social Security benefits. FALSE
While often thought of as an entitlement program, Social Security isn't something you're simply handed when you retire because you're an American citizen. In order to earn the right to receive Social Security benefits when you retire, you'll need to have earned 40 lifetime work credits. In 2017, you can earn a credit for each $1,300 in earned income, with a maximum of four work credits earned per year. Though the amount you'll need to earn for each credit tends to rise each year with inflation, you pretty much need just 10 years of part-time work to ensure you'll receive Social Security benefits when you retire.
2. My Social Security benefit grows by 5% for every year that I wait. FALSE
A lot of Americans are fully aware that their Social Security benefit will increase in value for each year that they wait, but the vast majority have no clue by how much. For each year between the ages of 62 and 70 that you wait to file for benefits, your payout increases by approximately 8%. If you claim as soon as possible, age 62, your benefit could be 25% to 30% lower than your calculated full retirement age benefit, while waiting until age 70 could yield a 24% to 32% increase over your full retirement age benefit.
Social Security retirement benefit schedule for people born between 1943 and 1954. Chart by author. Data source: Social Security Administration.
3. My full retirement age is based on the year I was born. TRUE
Figuring out what you'll receive from Social Security begins with understanding your full retirement age (FRA). Your FRA is a fluid figure that changes based on the year you're born. Simply put, your FRA is the point at which the Social Security Administration deems you eligible to receive 100% of your benefit. If you start benefits before reaching your FRA, your benefit is reduced. Conversely, if you wait until after your FRA to file for benefits, you'll nab a higher payout than what you'd have received at your full retirement age.
4. Waiting as long as possible to start benefits is always the best move. FALSE
Based on the preceding premise, waiting until age 70 is going to give you the biggest monthly payout, but that doesn't mean waiting until age 70 to file for benefits is always the best move. In some instances, starting benefits early makes a lot of sense. For instance, if you're in poor health, have been laid off and can't find work, are rich and not reliant on Social Security income, or are married and have substantially lower lifetime income than your spouse, then claiming early is a potentially smart choice.
5. Suspend-and-file is one of the best strategies my spouse and I have available. FALSE
This is a bit of a trick question, because Congress passed legislation in 2015 that eliminated the opportunity to take advantage of the file-and-suspend strategy as of April 29, 2016. File-and-suspend allowed a lower-earning spouse to collect spousal benefits while the benefits of the primary income earner (and even the spouse) were suspended and allowed to grow until age 70. If you're a widower, or you turned 62 by Jan. 1, 2016, you can still use the file-and-suspend strategy via a grandfathered clause, so go ahead and give yourself a point if you said "True" and you fit this description. But the vast majority of married Americans no longer have the file-and-suspend option.
Image source: Getty Images.
6. There is a minimum Social Security benefit of $500 a month. FALSE
Believe it or not, there isn't much in the way of set minimum Social Security benefits. Since 1973, the Social Security Administration has used a special formula to account for minimum benefits, but you'll need to have 40 lifetime working credits and have worked for between 11 and 30 years to get the the special minimum benefit amount, which can be as little as $40 per month in 2016 with 11 years of coverage. Normally, the standard primary insurance amount calculation that determine your benefit is going to be higher, rendering the minimum benefit calculation somewhat of a moot point. But, the final answer is "no," you won't receive a minimum benefit of $500 a month and may wind up with less if you simply worked part-time throughout your life.
7. There is a maximum Social Security benefit. TRUE
This is true as well there is a maximum monthly payout tied to Social Security. Though the figure changes from year-to-year based on inflation, in 2017 the maximum monthly payout at full retirement age is $2,683, up from $2,639 a month in 2016. Keep in mind that if you wait until age 70 to start taking benefits, and you're among the well-to-do who qualifies for this maximum payout at their FRA, your payout could be up to 24% to 32% higher than this maximum monthly payout of $2,687 in 2017 depending on your birth year.
8. My Social Security benefits aren't taxable. FALSE
Despite being responsible for your portion of payroll taxes while working, you're also likely to pay some federal tax on a percentage of your Social Security benefits during retirement. According to The Senior Citizens league, 56% of retired workers receiving Social Security owed tax on a percentage of their benefits in 2015. Any individual with more than $25,000 in earned income, and joint filers with more than $32,000, can expect to owe at least some federal tax on their benefits.
Image source: Getty Images.
9. While important for all seniors, Social Security is more important for women. TRUE
Not to discount the importance of Social Security for men, but the program is especially important for women. Women are often the caregivers of sick family members and friends, and usually responsible for taking time out of their careers to take care of their kids. This is especially true for married women. This means married woman tend to have less in lifetime earnings than their male counterparts. However, women tend to live five years longer, on average, than men, meaning the survivor benefit of their husband, or perhaps their own benefit based on their earnings history, is very important.
10. Social Security is going bankrupt and won't be there for me when I retire. FALSE
Nope, Social Security isn't going bankrupt, although it does need a helping hand at some point in the next two decades. According to the Social Security Board of Trustees, the more than $2.8 trillion in spare cash currently held in the Social Security Trust is expected to be exhausted by 2034. If this extra cash is depleted, an across-the-board cut in benefits of up to 21% may be needed to sustain the program through the year 2090. However, as long as Americans keep working, payroll tax revenue will still be collected, meaning the program is incapable of going bankrupt.
If you got at least seven out of 10 questions correct, go ahead and pat yourself on the back. But, keep in mind that missing even one basic question could wind up costing you during retirement. The more you learn about Social Security, the better your chances of maximizing your lifetime benefit.
The $15,834 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $15,834 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after.Simply click here to discover how to learn more about these strategies.
Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, and check him out on Twitter, where he goes by the handle@TMFUltraLong.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.