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Social Security is an important source of income for most U.S. retirees. On average it accounts for almost 40% of retirement income. Social Security becomes more important the longer a person is retired, often accounting for 50% or more of income for older retirees.
Yet, many retirees make decisions that cost them additional lifetime benefits of $100,000 or more. The Social Security rules and choices are complicated, so it’s understandable people have trouble optimizing their benefits, especially by making seven common mistakes.
Many married couples fail to coordinate benefit decisions. often, each spouse decides separately when to retire and begin receiving benefits. That often works until the solo years, after one spouse passes away. The couple had been receiving two Social Security benefits. After one spouse passes away, the other spouse must maintain the household while receiving only one benefit check.
The general rule is the surviving spouse will receive the higher of his or her earned retirement benefits and the benefit the other spouse was receiving at the time of death. If both spouses claim benefits early, the survivor’s benefit coming into the household will much lower than it could have been.
It’s often best for the spouse with the higher career earnings to wait as long as possible, preferably to age 70, to begin receiving benefits. This effectively is a very inexpensive form of life insurance.
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Most beneficiaries claim benefits too early, and it happens because they underestimate life expectancy. Social Security is longevity insurance. It protects you from outliving your income should you live a long time.
Many people believe they won’t live long enough to benefit from delaying benefits, but the data indicate they’re wrong.
A man age 65 years old today has a 50% probability of living until at least age 87. One in four men who are age 65 today will live to age 93. Women have longer life expectancy. One in four women age 65 today will live to age 96.
Life expectancy is longer than average for those who are in good health today. Life expectancy also is longer for those with higher lifetime incomes and higher education levels.
It’s important for married couples to consider joint life expectancy. When each spouse is age 65 today, there’s a 75% probability at least one spouse will live to age 88 or longer. At least one spouse has a 50% probability of living to 93 and a 25% probability of living to 98.
In almost 75% of married couples, one spouse will outlive the other by at least five years. In at least 50% of couples, one spouse will outlive the other by at least 10 years.
Relying on the Social Security Administration (SSA) is another common error. I’ve heard anecdotes of people receiving incorrect advice from SSA representatives and being given different answers to the same question by different SSA reps.
More importantly, the Office of the Inspector General of the SSA issued several audit reports in recent years documenting recurring mistakes made by the SSA in computing people’s benefits or advising them on benefits.
You should be aware of the basic Social Security rules before talking with anyone at SSA or applying for benefits, which you can do by reading my book, Where’s My Money?: Secrets to Getting the Most out of Your Social Security or by reviewing the Social Security web site.
Another good idea is to use an online calculator to estimate your benefits in different scenarios. You can do this by opening a “my Social Security” account on the Social Security web site and using the benefits estimator that is part of the web site. You also can use one or more of the calculators others offer online. You might want to work with a financial advisor who has an expertise in Social Security benefits.
Many people don’t realize all the benefits for which they’re eligible. In addition to retirement benefits based on their own earnings records, many people are eligible for other benefits.
If you’re married, you’re probably eligible for spousal benefits (generally 50% of your spouse’s full retirement benefit). You also might be eligible for benefits based on the earnings record of an ex-spouse. If the ex-spouse passed away, you might be eligible for survivor’s benefits based on the ex-spouse’s work history. A widow or widower might be eligible for his or her retirement benefits, survivor’s benefits, and benefits based on an ex-spouse’s earnings history.
No matter how many benefits you’re eligible for, you’ll be paid only one at a time. But you’ll be paid the highest of the benefits.
Another common oversight is not realizing some benefits decisions can be changed.
For example, within the first 12 months of claiming retirement benefits, you can change your mind by filing to withdraw your application for benefits and repaying all the benefits received to date (no interest is charged). Then, you start over as though you never applied for benefits. When you eventually begin benefits, you’ll receive full credit for delaying benefits.
Once the 12-month deadline is passed, you still might be able to make a change. After reaching full retirement age, you can suspend benefits. No benefits will be paid until you release the suspension or turn age 70, whichever occurs first.
During the suspension, you receive delayed retirement credits that increase the amount of your benefits by 8% every 12 months.
Surviving spouses also have special rights. They can apply to receive only one type of benefit (either retirement or survivor’s benefits) and later switch to the other benefit when it is maximized. By the way, ensuring surviving spouses benefit from these options and are paid the maximum allowable benefit is one area the Inspector General found the SSA frequently falls short.
Many people misunderstand the earned income limit for those receiving Social Security benefits. It’s not illegal for someone who’re receiving Social Security benefits to work or operate a business, but their earned income could limit their benefits.
The earnings limit applies only to those younger than full retirement age, which is between ages 66 and 67 for most people retiring now and in the near future. Once you reach full retirement age, there’s no reduction in Social Security retirement benefits for earning income.
Also, only “earned income” from employment or self-employment reduces benefits. Pensions, annuities, investment income, and similar income isn’t counted against you.
The earnings limit doesn’t eliminate your benefits. Through a complicated formula, it defers the benefits. They’re supposed to be spread over the years after you turn full retirement age. But beware. The Inspector General found the SSA often miscalculates the adjustment for benefits that were deferred because of the earnings limit.
Your benefits can increase when you keep working past age 70. You stop receiving delayed retirement credits for delaying Social Security benefits once you reach 70. But you still might increase benefits if you continue working.
Each year Social Security recalculates the benefits of anyone who continued working while receiving benefits. The earnings for the last year are added to your work history. Social Security uses the highest 35 years of earnings to calculate your benefits, adjusting the earnings for inflation. If your earnings in the latest year are greater than the inflation-adjusted earnings of an earlier year, the latest earnings replace the older earnings and increase your future monthly benefits.
Social Security benefits are one of the most valuable assets many people have. You can make them worth even more by avoiding some common mistakes and maximizing your lifetime benefits.