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

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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 fromthe Social Security Administration. And for 62 percent of them,those checks accounted for at least half of their monthlyincome.

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

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

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

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In 2015, the report points out, only 28 percent of the1,500-plus participants in MassMutual’s 10-question true-or-falsequiz on Social Security got a passing grade,defined as seven or more answers correct.

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One person out of 1,500 successfully answered all questionscorrectly—but that doesn’t bode well for how efficiently peoplewill be able to navigate the Social Security system to theirmaximum benefit.

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And that’s gonna cost them.

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So before you make any big mistakes, either because you didn’tunderstand the decisions you faced or because you simply didn’trealize that there were choices to be made, here are 10 things youneed to know about Social Security before you start the paperworkto retire:

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Photo: Shutterstock

10. 4 factors determine Social Security benefits.

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

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

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

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If you want to get a bigger SS check, you need to work at least35 years—maybe longer, especially if some of those years werepretty lean or empty.

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

9. Know your full retirement age.

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

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But while you can’t control your birth year, you can control(well, maybe) your retirement year. While you’re allowed to drawbenefits starting at age 62, if you do so at any point between age62 and one month prior to your FRA, you’ll end up with a permanentreduction in your check of up to 30 percent.

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

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

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Photo: Shutterstock

8. Figure how much you’ll get.

The SSA conveniently provides a paper statement to workers thatlists their estimated monthly benefit at FRA once every fiveyears.

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

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

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

7. Know how much of your wages Social Security willreplace.

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

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

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

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

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Photo: Shutterstock

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

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

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

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

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

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

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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.

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

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

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Even worse, these income thresholds have never been adjustedfor inflation, meaning a tax that once affected about one in10 households receiving benefits now impacts 56 percent as of 2015,according to The Senior Citizens League.

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

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

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

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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 annuallimit of $44,880, until you reach your FRA.

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There is a little good news: you don’t actually lose thatmoney. 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.

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So you won’t be able to increase your income between age 62 and70 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 youfile could directly affect what they can receive in survivorbenefits if you pass away.

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

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Waiting until full retirement age or later to claim benefitsmeans that a higher-earning spouse who passes away first could givetheir lower-earning spouse a means to claim a higher survivorbenefit.

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

The SSA does have a kind of escape hatch that can allow early filers, orthose who regret taking benefits, to potentially undo theirclaim.

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

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

1. Benefit cuts might lie ahead.

The Social Security Board of Trustees’ 2017 report has projectedthat the program’s $3 trillion in asset reserves is expected to becompletely exhausted by 2034—meaning that a projected $12.5trillion shortfall could lie ahead sometime between 2034 and2091.

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If Congress is unable to find a way to generate more revenue(translated: agree on any kind of action), the Trustees theorizethat benefits might have to be cut as much as 23 percent—across theboard—to keep the system functioning and making payouts through2091.

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

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

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