Maybe it’s all those years of hearing that Social Security is “going broke.”  Or, more recently, that the federal government itself is, thanks to the trillions of dollars of debt it’s running up to repair the financial system.  Personally, I think there’s a lot of “They owe me” thinking going on.

Regardless of the underlying reason, millions of Americans on the cusp of retirement are about to make a critical decision -- one that will literally affect them for the rest of their lives -- in ignorance.

I’m talking about when to begin receiving Social Security benefits.

According to a survey by Fidelity Investments, nearly half (45%) of those age 61 plan to pull the trigger by their next birthday.  In other words, as soon as they can.  The problem is, most don’t know that their benefit will be reduced by 25%.  That’s because they’re not eligible to receive their “full” benefit until they are 66 years old. Starting four years sooner means their check will permanently be smaller. The amount isn’t bumped up once you reach your “full” retirement age.

The decision to begin receiving Social Security early doesn’t just affect the individual entitled to the check.  Upon their death, the amount their surviving spouse is entitled to will be 30% smaller.

On the other hand, waiting until your “full” retirement age means you’re entitled to 100% of your benefit. Surprisingly, one out of four of those surveyed had no idea what age that is. (It’s 66 for anyone born from 1943-1954.)

Waiting longer than that has a big payoff.  If you have enough money coming in from other sources, delaying the onset of Social Security beyond your full retirement age, results in an 8% increase in your benefit per year.  (Increases stop once you reach age 70.)

As Social Security spokesperson Dorothy Clark explains, say your monthly benefit is $1,000 at your full retirement age. Waiting four years means your check will be $1,320. That’s one-third more income!

Actually, it’s more than that.  That’s because each year’s cost of living increase (COLA) is added to the 8%.  The COLA for 2009 is 5.8%, one of the largest in decades.  Anyone currently entitled to their full benefit and who postpones the start of Social Security for just one year, is guaranteed nearly a 14% raise.

A spokesperson for the American Academy of Actuaries told AARP that, “Waiting until age 70 gives you a much bigger income for the rest of your life -- no matter how long you live, no matter how bad the stock market. And your payment goes up with inflation.” (1)

Certainly, a lot of the folks who said they will file for “early” benefits don’t have a choice: they need the money for basic living expenses.  But either they’re not reading the annual benefit statement that Social Security sends out, or they’re living in the 1960s, because they’re expecting their check to make up half of their total retirement income. In fact, on average, retirees say Social Security represents slightly more than one-third of their income.

They’re also failing to consider how Social Security fits into an overall plan for generating the income they’ll need over a 20- to 30-year retirement.  In fact, nearly three-quarters of those who expect to start Social Security as soon as possible have no plan at all. 

(Of course, taking Social Security early may be the best option for someone who is in poor health or doesn't expect to live very long, as well.)

Fidelity vice president Ken Hebert says the mutual fund company undertook the survey in order to gain an understanding of what people do and don’t know about Social Security.  “I won’t say we’re surprised at the lack of knowledge because it’s a complex topic. We wanted to pinpoint where Fidelity could help customers increase their literacy about Social Security.”

To that end, Fidelity has dedicated a section of its Web site to Social Security issues, www.fidelity.com/socialsecurity.  You’ll find a comprehensive amount of information on Social Security’s user-friendly Web site, www.ssa.gov.  From the home page, click on the “Retirement” tab.

Other costly misconceptions near-retirees have about Social Security include:

- More than half don’t know that you need to file for benefits three months before you want your checks to start arriving.

-Nearly a third don’t think Social Security benefits are taxable.  In fact, up to 85% of your benefit could be subject to income tax.

-More than 70% aren’t aware that the spouse who didn’t work or who earned a lower salary might be able to receive a benefit based on the work history of the higher-earning spouse.

I’m just as disgusted with our politicians in Washington as you are over the fact that they haven’t had the guts to address the solvency issues surrounding Social Security. 

Still, even if benefits and contributions remain unchanged, the latest projection is that the “Trust Fund”-- the extra money we’ve been paying into the system since the 1980s -- will cover outlays until 2041. At that point, Social Security will still be collecting roughly 75 cents for every dollar in benefits.

Considered objectively, Social Security is an inflation-adjusted, government-guaranteed, lifetime annuity.  The income it provides is too important to be taken lightly -- just ask your grandmother.  Choosing when to begin receiving your benefit is one of the most significant decisions you will have to make. 

1. “Social Security: It's Better if You Wait.” http://bulletin.aarp.org/yourmoney/socialsecurity/articles/social_security__it.html