When and how you claim Social Security benefits is one of the bigger decisions you will face as you transition from your working years into your post working years. For many folks, Social Security will be one of their largest retirement resources, and its often the most mismanaged.
Irrevocable decisions could potentially add or subtract tens of thousands of government backed, inflation adjusted, and tax advantaged dollars from your lifetime retirement resources. One right decision could add thousands of dollars annually to your retirement income. One wrong move could result in permanently forfeiting precious retirement resources that you can’t get anywhere else.
Everyone Has an Opinion
It doesn’t seem to hard to find someone willing to give you advice about how you should claim your Social Security benefits. It seems everyone has an opinion.
You can Google search the topic and find hundreds of articles and postings offering conflicting opinions. Seemingly knowledgeable sources like financial professionals or Certified Public Accountants may opine on the topic. The news media will report on it. Politicians will kick it around like a political football. Co-workers or even a brother in-law are likely to share their ideas and thoughts if asked.
Even those who have little understanding of how the program works, or how to coordinate social security benefits with your other retirement resources, seem to share openly. Uninformed, yet overly confident, they are the most dangerous in our opinion.
They spread rumors with gusto and share opinions as if they were fact. Little do they know, the misinformation that they share so freely often persuades the people dearest to them to make decisions that affect many tens of thousands of dollars in future social security benefits.
One of the challenges as a financial planner specializing in retirement income planning, which includes optimizing Social Security benefits for the household, is overcoming misconceptions. Popular beliefs about the Social Security program are often myths that have been passed on from person to person until they are perceived as fact.
In this article we’ll address three of the most common misconceptions regarding social security benefits, and then share several reasons why you may want to consider a delayed strategy when claiming your Social Security benefits.
Misconception #1 – Get The Getting Before It’s Gone Cause It’s Going Broke!
The news media, politicians, and others seem to spread this message to drum up fear and push their agenda. Many people believe Social Security is going broke as a result. They believe that once the trust fund is empty they’ll be nothing left for anyone.
Often times folks will make an irrevocable decision to claim Social Security benefits early because they want to “get the getting before it’s gone.” In fact, according to the Social Security Administration over 70% of folks have claimed benefits prior to Full Retirement Age. In doing so they have permanently volunteered to forfeit a significant percentage of their lifetime retirement benefits.
The earliest that you can claim is age 62. It so happens that this is the most popular age to claim as well. Nearly 40% of folks from a 2012 study claimed at age 62, an immediate forfeiture of 25% of their full retirement age benefits. A $2,000 a full retirement age benefit would be reduced to $1,500.
Then there is the issue of the cost-of-living adjustments that are also forfeited. When somebody claims early, they don’t just forfeit part of their Social Security benefit, they also permanently forfeit all of the cost-of-living adjustments they would’ve received on the forfeited amount.
It may not seem like much, however added up cumulatively over nearly 3 decades it means significant retirement resources have been eliminated from the household plan. All of this can add up to tens of thousands of dollars in forfeited benefits. Benefits that are uniquely government backed, inflation adjusted & tax advantaged.
Misconception #2 – Checks Will Stop When the Trust Fund Is Exhausted
We find that many folks are surprised to learn that even if the Social Security trust fund was to run dry that benefit checks won’t stop coming. The misinformed belief is that when the Social Security system is completely empty, no more cash in the piggy bank, they’ll be forced to stop sending checks to those who are receiving benefits. This is flat out false! The Federal Government has ways of raising revenue that the rest of us do not.
If no changes were made to the Social Security system by Congress the Social Security Administration estimates that the trust fund will be empty somewhere between 2033 and 2035. However, even if this were to happen, those who are receiving benefits will still get their checks albeit a reduced benefit.
If you investigate page 2 of your green and white social security estimate statement under “your estimated benefits” there’s a disclosure made to this point. It is estimated that Social Security will only be able to pay somewhere between $0.75 to $0.80 on the dollar of promised benefits.
The Estimated date at which the trust fund will no longer be sufficient to pay 100% of the benefits, and the percentage of benefits that payroll taxes are estimated to cover does fluctuate from year to year. Nevertheless, benefit checks will not stop because the government will tax those still working and send benefit checks to those on claim.
Reduced amount or not, a Social Security benefit check that is government backed, inflation adjusted, and tax advantaged is a tremendous retirement resource that you cannot get anywhere else. Voluntarily forfeiting thousands of dollars of this special retirement resource on an annual basis for the remainder of your life do to misinformation would be unfortunate.
Misconception # 3 – I’ll Receive More Over Time If I Claim Early.
Some folks believe that they would be better off claiming Social Security early because they’ll receive more checks, theoretically, overtime. Even if they are reduced, these folks have been led to believe that cumulatively they will be better off.
If you lived to the ripe old age of 90 and you begin claiming Social Security checks at age 62 you will receive 28 years’ worth of benefits. If you wait to full retirement age, say 66 for example, and live to age 90 you will only receive 24 years of benefits. You get 4 more years, or 48 more checks by claiming early.
However, cumulatively you’ll receive more benefits by delaying to your full retirement age, or beyond. A $2,000 monthly benefit voluntarily reduced to $1,500 by claiming at age 62 with a projected annual cost of living adjustment of 2% annually would yield cumulative benefit through age 90 of $666,921. Waiting to full retirement age and collecting 48 fewer checks under the same assumptions would produce a cumulative benefit of $730,124, or $63,203 more!
Forfeiting your Social Security benefits to claim early, as well as forfeiting the cost of living adjustment on all those forfeited benefits, will likely add up to tens of thousands of dollars for many folks.
Good Reasons To Consider A Delayed Strategy
There are many reasons to delay claiming Social Security benefits. Once we have addressed a few of the common misconceptions and cleared the air for folks they are often more open minded to hearing reason to consider a delayed strategy.
No Forfeiture Of Benefits and COLAs
First and foremost, by waiting until your full retirement age to claim you will avoid forfeiting a significant percentage of full retirement age benefits and the cost-of-living adjustments that you would receive on those lost benefits.
Unless you have been diagnosed with a life-threatening medical condition that could potentially shorten your life expectancy, or you have a family history of shortened life expectancy due to hereditary health complications, waiting at least until full retirement age often makes sense.
Avoiding the Earnings Limit
Many folks are still working in their early to mid 60s, and claiming Social Security prior to full retirement age will subject your Social Security benefits to the earnings limit. If you’re making good income there’s a chance that you may not receive a benefit check at all if you claim early simply because you exceed the earnings limit.
For example, in 2019 if your income is greater than $17,640 you will end up giving back one dollar for every two dollars that you earn over that amount. Many full-time employed folks earn enough income that they’ll end up giving back most or all of her Social Security check, and receiving nothing. The benefits are not gone for good as they get added back into your benefits later. Nevertheless, in that event why would you want to claim early.
Super-Size Survivor Benefits
Another great reason for claiming benefits under a delayed strategy is to increase the survivor benefit. Often times one spouse is a lower wage earner, and the other spouse is a higher wage earner. When one of the spouses passes away, the surviving spouse will generally receive the higher of the two Social Security benefits, and lose the lower one.
Often times we see that it makes sense for the lower wage-earning spouse to claim benefits early, and get cashflow coming into the household retirement income plan. Meanwhile it often makes sense for the higher wage earner to delay benefits in order to earn delayed retirement credits and increase the future survivor benefit.
Many women outlive their husbands by more than a decade. Most survivor benefits are received by widows. Therefore, it can be somewhat of a women’s planning issue when making smart Social Security claiming decisions.
It’s quite common to see a husband with a higher Social Security benefit. There may be many reasons for this and while it is not always the case, it is common. Meanwhile the wife may have been the lower wage earner for a number of reasons, and she is often the younger spouse.
It is really a selfless decision for an older male spouse as a higher wage earner to delay claiming Social Security benefits. There’s a natural desire for him want to claim early and start receiving benefits on his record. After all, he wants to get if before it’s gone, or before he’s gone.
However, delaying so that the survivor benefit is optimized will likely have a profound impact on his spouse after he’s gone.
Acting on impulse and claiming early under these conditions could be viewed as a selfish decision. It would permanently reduce his Social Security benefits, lose out on any delayed retirement credits, and thus reducing the survivor benefit permanently.
Coordinating benefits with your spouse is one of the primary reasons to seek guidance from a financial professional who specializes in retirement income planning and Social Security optimization.
We’re Living Longer
Another reason for delaying Social Security claiming is that we are living longer and our retirement income must last as long as we do. Life expectancies have increased substantially. According to the Society of Actuaries 1 in 3 men and 1 in 2 women in their mid 50s will live to be age 90. For couples age 65 today there’s a 50% chance that one of the persons will live to age 92.
Developing a plan in which your retirement resources are exhausted at your life expectancy is a plan that will fail 50% of the time. This is because by definition life expectancy is the midpoint at which half your peer group is alive and half of your peer group has passed. If your retirement income plan isn’t sufficient to get you beyond your life expectancy, the odds of running out of your money may be the same. You can flip a coin.
Delaying Social Security benefits is one way to increase the odds of not running out, and planning for the wellbeing of the surviving spouse.
It’s Tax Advantaged Income
Another reason for claiming a delayed strategy is the potential tax benefits. When working with a financial professional who understands how to coordinate all of your retirement resources including Social Security strategies it may be possible to reduce your taxable income during the waning years of retirement.
Believe it or not, sometimes it makes more sense to delay your Social Security benefits, and use some of your pretax (IRA or 401K) retirement assets to fill the gap. For example, if someone wanted to retire at age 65 it might make sense for them to use some of their pretax money to maintain their lifestyle from age 65 to age 70 while they allow their Social Security benefits to earn delayed retirement credits.
By the time they turn on Social Security which is tax advantaged, government backed and inflation adjusted, they may have spent down a good portion of their pretax dollars. In that case their required minimum distributions after age 72 (previously 70 ½) are likely to be lower than they would have been otherwise. Since distributions from pretax accounts have a profound impact on the taxation of your social security benefits this may be one way to mitigate taxes on your social security benefits.
The decision about when and how to claim Social Security benefits in order to maximize your household retirement resources is not one you want to take lightly. It’s probably not something you want to do on your own. Therefore, it may be wise seek the guidance of a financial professional who specializes in Social Security optimization and retirement income planning.
Many financial advisors have little to no experience when it comes to social security optimization. They have become experts in wealth management, investment management, and other factors impacting the accumulation phase of retirement saving. However, retirement income planning and the art of distributing assets to last a lifetime requires a completely different set of skills and knowledge.
The social security administration won’t be able to help either. They will do the best job they can to get you the highest benefit you are entitled to the day that you file. However, they are not allowed to give advice or coordinate your benefits with your other retirement resources.
We would strongly recommend seeking the guidance of a comprehensive fee-based planner. Specifically, one who will thoroughly diagnose your specific circumstance, and is equipped with the proper knowledge, team, and tools to organize and analyze all of retirement resources before you make any irrevocable decision.
Your advisors should be expected to complete an analysis including a(n):
- Thorough evaluation and suggested optimization of household Social Security benefits
- Review of your investment allocations, performance, and fees
- Projection of taxes in retirement and offer strategies to manage and mitigate them
- Analysis of healthcare costs including Medicare premiums and copays
- Evaluation of long-term care risk exposure to you and your family
- Review of your current estate plan documents.
Don’t feel like you have to settle for anything less! Make sure you get a complete draft of a retirement income blueprint outlining how best to utilize all of your retirement resources to maintain your desired lifestyle, pay as little in taxes as possible, minimize the impact of investment fees, plan for expected health care needs and unexpected long-term events, and efficiently pass any remaining assets and possessions to the next generation.