March 6, 2018

3 Costly Social Security Mistakes

Maximizing your Social Security benefits can make a big difference in your retirement income for of all levels of wealth
Dawn Doebler, CPA, CFP®, CDFA®

Whether you’re wealthy or have more modest assets, the question of how best to maximize your Social Security benefits can make a big difference in your retirement income.  With today’s complicated family situations, we find that many people have more questions as they approach age 62, the earliest age most can first claim social security.  For couples facing this decision, oftentimes there’s a difference of opinion about what choice is right. 

As you approach your 60s and face the complicated web of social security regulations, we think it’s helpful to understand some basic facts about how these benefits work. Then, you can begin to consider how the specifics of your personal situation impact your claiming decisions. One caveat is that federal public employees do not pay into social security. These employees have benefits calculated in a unique way, and spousal and survivor benefit rules will apply differently to them. 

Claiming decisions differ for a variety of reasons including someone’s personal preference, their health, whether they are married, if their spouse works, if they have pension or other sources of income, and their level of assets, such as 401ks and trust accounts that can be used for retirement cash needs.  That said, there are some actions to avoid if your goal is to maximize your monthly benefit:

1. Claiming before full retirement age:

According to the Center for Retirement Research at Boston College, 90% of Americans start collecting Social security retirement benefits at or before their full retirement age with the most popular age to start being 62. This option may make sense if someone has no other source of income or assets to live on, or in cases of disability or lower expected lifespan.  Absent these circumstances, this can be a costly decision because claiming at age 62 (instead of waiting until full retirement age of 66 or later) can reduce benefits by up to 25% for the remainder of your lifetime.  Claiming early also affects potential benefits for a surviving spouse, and that impact should be factored into calculations to quantify the total impact of claiming early.    

2. Retiring too soon: 

One common mistake is assuming your monthly benefit will equal the benefit estimate provided on your Social Security Administration statement. That estimate assumes you continue to work and earn the same level of income from now until your full retirement age. For example, if you retire earlier, either electively or due to health reasons, your actual monthly benefit is likely to be lower than the estimate. The calculation that really counts is the final benefit amount that factors in your 35 highest earning years. If you happen to retire during your peak earning years and have only worked for a total of 32 years, your benefit calculation would include three years in which you earned zero dollars.  Women who are obtaining benefits based only on their own work record will want to be aware of this potential impact as many enter the workforce later, take time off to raise children, or never reach maximum social security wage levels due either to lower wages or choosing to work part-time. 

One common mistake is assuming your monthly Social Security benefit will equal the benefit estimate provided on your Social Security Administration statement.
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3. Taking a singular focus:

In 2015, the common file-and-suspend tactic was phased out for couples who were born after January 1, 1954.  For couples outside that grandfather date, now they can only claim a spousal benefit after the earning spouse files and begins receiving their own benefit. This change has caused many couples to rethink whether they still want to suspend benefits for the primary earner until age 70.  However, we see many cases where delaying for a higher benefit still makes sense, most especially when there’s one high wage earner with a significantly younger spouse. In that situation, it may be useful to suspend benefits until age 70 in order to maximize the potential survivor benefit for a nonworking spouse. 

Another reason to make this a joint decision is the increasing number of households where the woman is the higher wage earner. In this case, she may not need an older spouse to delay for survivor benefit maximization because she has accrued benefits on her own higher earnings and work record.  Since it’s common for spouses to disagree on the correct claiming strategy, we advise couples to run benefits projections under various assumptions for retirement date, expected late-in-life earnings, and longevity.  That way claiming decisions are made with the full understanding of the potential tradeoffs in benefits for the couple.  

Determining the best strategy for claiming your Social Security benefits can be even more complicated if you are divorced and single, divorced and remarried, or widowed. In my next article, I plan to explore some of the options women should consider before claiming their Social Security.

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Dawn Doebler, CPA, CFP®, CDFA®

Dawn’s experience spans more that 25 years providing wealth management, financial planning and corporate finance solutions for clients. As an MBA, CPA, Certified Financial Planner (CFP®), and a Certified Divorce Financial Analyst (CDFA®), she is uniquely qualified to understand the challenges and financial needs of clients from executives to entrepreneurs, as well as single breadwinner parents. Dawn is a weekly contributor to WTOP radio.