Millions of Americans depend upon Social Security to deliver inflation adjusted monthly income. However, a single, uninformed decision can cost you hundreds of thousands of dollars over your lifetime.
Identifying costly Social Security mistakes such as claiming too early is the first step in maximizing your lifetime income.
- Filing early and permanently reducing your benefit. The earliest someone can collect Social Security benefits is usually age 62. This will result in reducing your monthly retirement payment for the rest of your life. Your reduction in benefits could be as high as 30%. Unless you absolutely need the income, delaying your claim is a significant method to maximize your lifetime benefits.
- Miscalculating your Full Retirement Age (FRA). Your full retirement age is the age at which you can collect 100% of your earned Social Security benefit. The FRA is based upon when you were born. Making a mistake in calculating your FRA can leave you with a permanent reduction in your monthly check from Social Security. You can check your FRA by visiting www.ssa.gov before making any decisions.
- Failing to capitalize on delayed retirement credits. The Social Security Administration (SSA) awards patience. For every year you delay claiming benefits between your FRA and age 70, your benefit is boosted by 8% through delayed retirement credits. If you cannot wait until age 70, then you will still get an extra 8% for each year that you did delay in claiming Social Security benefits. These credits stop accruing at age 70 so there is no need to delay claiming Social Security after this age.
- Overlooking survivor and spousal benefits. Social Security is not based solely on your own work history. If you are married (for at least a year) divorced (after being married for at least 10 years) or widowed, you may be eligible to receive benefits on your spouse’s or former spouse’s record. A spouse is generally entitled up to 50% of the higher earner’s FRA benefit. A widow or widower can receive up to 100% of the deceased spouse’s benefit.
- Not understanding how remarriage affects divorced spouse or survivor benefits. For divorced spouses (10-year marriage rule), if you remarry, you generally lose your eligibility to claim benefits based on your former spouse’s record. For widows/widowers claiming survivor benefits: remarrying before age 60 generally causes you to forfeit your survivor benefits based upon the deceased spouse’s record. Remarrying at or after age 60 allows you to keep the higher survivor benefit. Failing to understand the precise age rules when considering remarriage can cost you 100% of a valuable spouse/survivor benefit.
- Not paying attention to the earnings penalty while working. If you claim Social Security before your FRA and continue to work, you may be subject to the earnings test. The temporary benefit reduction can be a surprise if you are not prepared. Once you reach FRA the earnings test limits are removed and the SSA recalculates your benefit to give you credit for the amount that was withheld.
- Not correcting errors in your earnings history. Your earnings record is built throughout your lifetime and serves as the basis for how much your or your dependents would receive when you apply for benefits. Your Social Security benefit is based upon your 35 highest earning years. Any year that you did not work, counts as a zero which reduces your average. Review your earnings record and correct any errors as soon as possible.
- Ignoring your actual life expectancy. Some people claim benefits early because they doubt that they will live a long life. Others delay too long without considering their health. If longevity runs in your family, delaying benefits to age 70 may make sense. If your health is poor, claiming early may make more sense. Make a decision based upon your health and your financial situation.
- Being crushed by taxes on your benefits. Up to 85% of your Social Security benefits could be subject to federal income tax depending upon your income. Strategically timing withdrawals from retirement accounts such as an IRA or a 401(k) can help avoid unnecessary income taxes. Speaking with a tax professional could be a wise decision before making any final decision on when to collect Social Security and any other retirement plans.
- Treating Social Security as your entire retirement plan. Social Security was designed to be a foundation of your financial security once retired, not the entire floor. On average, it should replace approximately 40% of your pre-retirement income of a medium earner and about 30% for a high earner. A general rule of thumb is to replace 70% of your pre-retirement income while you are retired. This is a general rule and does not necessarily apply to everyone. A successful retirement requires a plan that integrates Social Security with savings, investments and other sources.
At Retirement Solutions, we have been providing the knowledge and leadership to clients for over 40 years. We have the experience to assist you to plan or evaluate your retirement situation. We offer a no-obligation, no-cost 15 minute consultation to determine if we can be of assistance to you and whether you can profit from our expertise. You can contact us by hitting the link in the upper right corner of the Home Page of the Retirement Solutions website:www.retirementsolutions.net.