Social Security Mistakes Could Cost You Thousands
Too often as financial planners, we see people who have made or are about to make one of four significant social security claiming mistakes based upon misunderstanding or poor advice.
These choices could end of costing thousands of dollars in benefits should they or their spouses live beyond an arbitrary age of 80, a common life expectancy point where early, the normal or delayed beginning of benefits meet. We call that the breakeven point.
Analyzing different social security claiming strategies is part of our role as financial planners. Almost everyone we see is eligible for social security retirement benefits and as part of their financial plan we calculate alternatives based on their needs and expectations.
No matter when you start social security benefits, you should get about the same amount of money. That’s the goal of actuaries (number crunchers) when setting benefit payments. Equal treatment is the objective. Equal treatment, that is, until you reach the breakeven point which we’re setting as age 80 in this article for ease of understanding. Breakeven is slightly different for everyone based on birth date, social security contributions and years of non-participation in employment where employers and employees did not participate in the social security system via payroll tax deduction.
The 4 big mistakes?
- Claiming social security benefits at age 62 while still working. Almost half of social security participants claim retirement benefits as soon as they can which is age 62. However, many recipients may not realize that there is an “earnings test” that limits their benefit after $18,240 (for 2020) in wages or self-employment, where the program deducts $1 back for every $2 over the limit. By the time you earn $48,600, you’ve had to give back all the benefits you’ve received. How do they do it? They take it back on your income tax return. There is no earnings test at full retirement age and beyond (age 66-67 depending on birth year).
- Believing the benefit amount on the front page of your report is correct. That number in bold type is only applicable if you continue contributing like you’re currently doing and begin receiving benefits at full retirement age, 66 to 67 depending on your birth year. Many people retire early and don’t contribute for several years before claiming their benefit. That means there is a zero for those years. Since the benefit is based up the highest 35 years and they fall short of that number, their benefit will be recalculated and reduced. That is a shock when they realize how much they aren’t getting that they had counted upon.
- Counting on a spousal benefit that’s no longer available or your spousal benefit self-calculated number is wrong. There used to be an option of taking a spousal benefit and delaying your own benefit to age 70 and letting it grow by 8% a year. If you are born after January 1, 1954, that option is no longer available. Additionally, if you’re waiting until age 70 to take a spousal benefit based upon your spouse’s age 70 benefit, forget it. Your spousal benefit will be based upon your spouse’s age 66-67 benefit and not their increased delayed benefit. This could become another mistake costing thousands in expected income that’s not coming your way.
- As the higher-earning spouse, you believe if you died at age 70 you would have forsaken thousands of dollars in benefits. That’s true as far as it goes for the higher earner, but what about the surviving spouse? He or she would be receiving a reduced inherited benefit if you claimed at an earlier age gave up the opportunity to claim the larger age 70 amount. That amount, if the surviving spouse lives to age 93, becomes over $100,000. Ouch.
Social security claiming options can be daunting. Mistakes can be costly. Besides financial planners and websites, there are several books on the topic of social security that answer hundreds of questions asked by participants in this increasingly complicated program. Make sure the publication date for books or articles is 2018 or later since significant changes occurred in 2017 and earlier. Also, stay focused on
this topic. The rules could change again and cost you thousands more.
