Social Security isn’t exactly the simplest program in the world to understand—yet it provides a lifeline for millions who have little or no retirement savings.

In fact, according to a Motley Fool report highlighted by USA Today, as of August, more than 42 million seniors were receiving a monthly stipend from the Social Security Administration. And for 62 percent of them, those checks accounted for at least half of their monthly income.

But hidden among all those complexities are forks in the road at which people have to make decisions that can either pay off big time or cost people serious amounts of money.

And since retirement cash is in such short supply for so many people in this country, it pays to learn about these decision points well ahead of time—before you hit retirement—lest you make the wrong decision or, perhaps worse yet, fail to make a decision at all due to lack of knowledge.

Understanding of the Social Security system isn’t one of the average American’s strong points.

In 2015, the report points out, only 28 percent of the 1,500-plus participants in MassMutual’s 10-question true-or-false quiz on Social Security got a passing grade, defined as seven or more answers correct.

One person out of 1,500 successfully answered all questions correctly—but that doesn’t bode well for how efficiently people will be able to navigate the Social Security system to their maximum benefit.

And that’s gonna cost them.

So before you make any big mistakes, either because you didn’t understand the decisions you faced or because you simply didn’t realize that there were choices to be made, here are 10 things you need to know about Social Security before you start the paperwork to retire:

10. 4 factors determine Social Security benefits.

Four factors determine the monthly Social Security benefit. You can control three of them: your work history, your earnings history, and the age at which you file.

The fourth factor is the year in which you were born—and of course there’s nothing you can do about that.

The amount of money you earned in your 35 highest-earning years is one thing the SSA takes into account.

If you want to get a bigger SS check, you need to work at least 35 years—maybe longer, especially if some of those years were pretty lean or empty.

Each year less of 35 worked causes a $0 to be averaged into your annual earnings history, which will lower your ultimate payout—and if you were out of work for a while, you might be able to get that year dropped if you can put in another higher-paying year to boost the average.

9. Know your full retirement age.

This is where your birth year is important, since FRA changes based on when you were born. That’s the age at which the SSA deems you eligible to receive 100 percent of your monthly benefit.

But while you can’t control your birth year, you can control (well, maybe) your retirement year. While you’re allowed to draw benefits starting at age 62, if you do so at any point between age 62 and one month prior to your FRA, you’ll end up with a permanent reduction in your check of up to 30 percent.

If instead, however, you file any time between one month after your FRA and age 70, you'll actually receive more than the 100 percent you'd get at your FRA.

Depending on your birth year, that amount over 100 percent could be up to 32 percent more if you wait until age 70, at which point the benefit hits its maximum. Benefits grow by 8 percent per year beginning at age 62, and hit the max when you hit 70.

8. Figure how much you’ll get.

The SSA conveniently provides a paper statement to workers that lists their estimated monthly benefit at FRA once every five years.

But if you misplaced the last one, didn’t understand it or just don’t want to wait, you can check your estimated retirement benefit at any time using the SSA’s various online estimating calculators.

There’s a quick calculator for a rough estimate, and one that requires additional information for a more accurate figure—but the accuracy factor goes up the closer you get to retirement.

Just don’t wait till the last minute; start checking early, so that you have some idea of what you’ll be depending on when the Big Day comes.

7. Know how much of your wages Social Security will replace.

Remember that Social Security was never intended to take the place of a full paycheck.

The SSA suggests that workers only expect their Social Security benefits to replace 40 percent of their working wages.

People who have low income might see that actually come closer to 50 percent, while those who have healthy paychecks might find a Social Security check won’t even replace a quarter of their income.

What’s scary about that is that a third of retirees depend on Social Security not as supplemental income, but as 90 percent or even more of their total income.

6. Realize that Social Security’s not as effective as it used to be.

It's scary how many retirees depend on Social Security for so much of their income, because those checks just don’t buy what they used to.

Even though benefits are tied to inflation as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), this index hasn't adequately accounted for the medical care and housing inflation that seniors have faced in recent years.

Many have suggested that it should be using the CPI for seniors, which does take their particular needs more into account.

As a result, according to an analysis from The Senior Citizens League, Social Security dollars have lost 30 percent of their purchasing power just since the year 2000.

Want more depressing news? In 33 out of the past 35 years, Social Security's annual cost-of-living adjustment has been smaller on a percentage basis than the medical care inflation rate.

No wonder everyone’s scared about the cost of health care.

5. Don’t forget to give the IRS its cut.

Yes, that’s right—Social Security benefits are taxable.

It didn’t used to be that way, but in 1983, Congress chose to pass amendments that exposed individuals earning more than $25,000 annually, and couples filing jointly earning more than $32,000, to having half of their Social Security benefits subject to the federal ordinary income tax.

And in 1993, the Clinton administration added another tier that allows up to 85 percent of benefits to be taxed at the ordinary rate for individuals and couples filing jointly who earn more than $34,000 and $44,000 a year, respectively.

Even worse, these income thresholds have never been adjusted for inflation, meaning a tax that once affected about one in 10 households receiving benefits now impacts 56 percent as of 2015, according to The Senior Citizens League.

4. Filing early and working could cost you—a lot.

If you want to file for benefits early but keep working, be warned that there’s an earnings test that will determine how much you actually get to keep.

Filers who haven’t hit FRA are subject to the earnings test, and in 2017, individuals who won’t reach their FRA could see $1 in benefits withheld for each $2 in earned income above the annual limit of $16,920.

If you’ll hit your FRA this year but haven’t done it yet, then $1 in benefits can be withheld for each $3 you earn above an annual limit of $44,880, until you reach your FRA.

There is a little good news: you don’t actually lose that money. But you won’t get your hands on it till you hit FRA, when you’ll get it in dribs and drabs with each benefit check.

So you won’t be able to increase your income between age 62 and 70 by working and collecting benefits at the same time.

3. Your claim could affect your spouse and/or family.

If you're married or have young children, the age at which you file could directly affect what they can receive in survivor benefits if you pass away.

Households in which one partner earned significantly more than the other need to be particularly aware of this, since if you file early you’re dooming your spouse/family to smaller benefits.

Waiting until full retirement age or later to claim benefits means that a higher-earning spouse who passes away first could give their lower-earning spouse a means to claim a higher survivor benefit.

2. There is a do-over, of sorts.

The SSA does have a kind of escape hatch that can allow early filers, or those who regret taking benefits, to potentially undo their claim.

SSA Form 521, the Request for Withdrawal of Application, will let you undo your claim and restore your benefits to that nice 8 percent growth rate till age 70—as long as you pay back every penny you’ve already gotten from the SSA.

If you don’t have the ready cash to do that and can’t raise it quickly, you might be out of luck, since you only have 12 months after you start receiving benefits to file the form and set the process in motion.

1. Benefit cuts might lie ahead.

The Social Security Board of Trustees’ 2017 report has projected that the program’s $3 trillion in asset reserves is expected to be completely exhausted by 2034—meaning that a projected $12.5 trillion shortfall could lie ahead sometime between 2034 and 2091.

If Congress is unable to find a way to generate more revenue (translated: agree on any kind of action), the Trustees theorize that benefits might have to be cut as much as 23 percent—across the board—to keep the system functioning and making payouts through 2091.

So beware: even if you do everything right, you might be seeing a benefit cut in the not-too-distant future.

Combined with its shrinking purchasing power, Social Security might not be the lifeline for you that it was for your parents.

Instant Insights /

10 things to know about Social Security before retirement

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