A Majority of Americans Are in Danger of Making This Expensive Social Security Mistake

You've worked hard your entire life, and you want your Social Security benefits to reflect that. But you're worried you might not get much because you never earned a six-figure salary.

While it's true that a higher income during your working years often translates to a larger Social Security benefit in retirement, that's not the only factor the Social Security Administration considers. It also looks at the length of your work history and when you sign up for benefits.

Most people don't understand how these factors play into the Social Security checks they receive. As a result, they miss a critical opportunity to maximize their checks and may even cost themselves tens of thousands of dollars in lost benefits.

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Do you know your full retirement age (FRA)?

If you've never heard of your full retirement age (FRA), you're not alone. A recent Nationwide survey found that just 21% of Americans correctly identified their FRA based on their birth year, with many guessing it was younger than it actually is. That's a big problem because your proximity to your FRA when you sign up for checks has a huge effect on how much you get.

You must wait to apply for Social Security benefits until your FRA if you want the full amount you've earned per check. FRA was once 65, but it's gradually increased over the years. The table below can help you identify what yours is if you don't know:

Data source: Social Security Administration.

You aren't prohibited from signing up under your FRA, though. You can claim Social Security as early as 62, but the extra checks come at a cost.

What happens when you claim Social Security early?

The Social Security Administration penalizes you for every month you claim checks under your FRA. You lose 5/9 of 1% per month (6.67% per year) for up to 36 months. If you claim more than three years early, you'll lose 5/12 of 1% per month (5% per year) for each additional month of early claiming.

If you qualify for a $2,000 monthly benefit at your FRA of 67, signing up immediately at 62 would shrink your checks to just $1,400 per month. That loss is generally permanent, though you'll get a small boost each year from cost-of-living adjustments (COLAs).

So underestimating your FRA as many in the Nationwide survey did can turn out to be a costly mistake. But that doesn't mean that claiming early is always the wrong choice. It could still be the right option for you if you have no other means of covering your expenses or if you have a short life expectancy and don't expect to live long enough to enjoy the larger checks you might be entitled to at your FRA.

But if you don't fall into one of those two camps, there's a good chance you could get a larger lifetime benefit by waiting until your FRA to apply -- or even later. Every month you delay your checks after your FRA increases your benefit by 2/3 of 1% (8% per year) until you qualify for your largest checks at 70. This could be your best option if you have a long life expectancy and you have a job or adequate retirement savings to cover your expenses on your own until then.

When you claim is ultimately your call, but it's important to understand the implications of your claiming age before you submit your application. If you're still on the fence, you can check out the benefit estimator tool in your my Social Security account. This gives you an idea of how much you'd qualify for at every claiming age based on your work history. You'll be able to determine how much waiting will increase your checks so you can decide whether it's worth it.

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