Enter the Labyrinth: What to Know About Social Security

Social Security has the potential to be a significant portion of your retirement income — even if you’re lucky enough to have an investment and 401(k) balance that allows you to sleep well at night.

A married couple can receive more than $1.5 million in lifetime Social Security benefits if they are long-lived. Think about that. Perhaps the difference between $2,000 and $3,000 a month may not seem like a lot at first, but if you live into your 90s or 100s, over time that’s a lot of Starbucks coffees.

If that same married couple selected a different claiming strategy, their joint benefits could be reduced substantially.

Subscribe to Kiplinger’s Personal Finance

Be a smarter, better informed investor.

Save up to 74%

Sign up for Kiplinger’s Free E-Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

That’s why all workers approaching retirement should consult a trusted professional adviser who is a knowledgeable Social Security consultant before deciding when — and how — to take Social Security.

It’s important to know the options before you claim and to coordinate spousal benefits and maximize spousal survival benefits. Here are five basics to know if you are thinking about claiming Social Security:

1. The government’s role is to run the Social Security program, not educate the public about it.

The role of representatives in the Social Security Administration (SSA) is not to assist, educate or explain Social Security options to retiring workers. SSA administrators are advice-neutral order-takers, and they tend to think inside the box. Due to the number of Social Security representatives who have retired from the organization, the representatives who are left are often not trained to offer out-of-the-box options, such as the restricted application or coordination of spousal benefits, which can provide a higher benefit long term.

What effect can this have on the average retiree? You can claim too early, reducing lifetime benefits for yourself and your surviving spouse, and end up leaving up to $300,000 on the table. That $300,000 is partially the difference between having a higher wage earner in a marriage claim as early as possible, say at age 62, vs. claiming at age 70 and benefiting from a lower-earning spousal benefit in the interim.

2. Not all professional advisers are knowledgeable about the Social Security program.

Some advisers mistakenly believe that retirement benefits are based on the last five years of earnings or the highest five years of earnings. But that belief is false. Social Security benefits are based on the highest 35 years of indexed earnings. “Indexed” means the earnings are indexed for inflation. The highest 35 years are used even if an individual didn’t work for 35 years, such as a parent who stayed at home raising children for a number of years.

For example, a spouse with 10 years (40 credits) of employment will have 25 years of zero income factored into his or her benefit calculation, resulting in a smaller benefit. In this situation, if you have enough time before hitting full retirement age (either age 66 or 67, depending on your birth year), it may be wise to go back to work to replace zero earnings with some positive earnings.

If you’re working with a professional adviser on when to take Social Security, make sure he or she is knowledgeable about Social Security. There are several national education programs for advisers about Social Security. Education programs that require an exam and offer a certificate may make the difference between employing a knowledgeable and educated Social Security adviser and one that’s less competent.

Some of the better Social Security education programs available include Horsesmouth; Social Security Timing; and National Social Security Advisor (NSSA), which is the largest Social Security education program in the nation to offer a certificate. (Disclosure: My partner Jim Blair, a former Social Security administrator, and I are affiliated with NSSA).

3. Get online, create your Social Security account and check your PIA and earnings history.

The Social Security Administration recently changed its policy of mailing paper statements. Printed statements will now be mailed only to those workers 60 and older who haven’t set up online accounts. Beginning at age 60, the Social Security Administration will send you a paper version every year.

But why wait until 60? It’s smart to establish an online account with the Social Security Administration for both yourself, your spouse and your children because you can receive more timely and frequent information online. If you don’t go online, you won’t be able to see your earning history or what your benefit should be. And you can’t monitor something if you don’t see it regularly.

Accounts can be created at www.ssa.gov or www.socialsecurity.gov. To verify your identity, the SSA will ask questions from your credit report and other public sources.

Once the account is set up, you can review your reported earnings and estimated benefits. This is a great financial disciplinary exercise that should be done annually. A good thing to note: The benefit you see predicted on your statement reflects the monthly amount you would receive if you kept earning at that same salary level up to age 70. If you lose your job or take a lower-paying job, your benefit will be lower than indicated on the projection.

It’s also important to understand basic Social Security terms such as primary insurance amount (PIA). PIA is the amount of Social Security benefits payable at full retirement age (FRA). If you have a PIA of $2,000 per month, for example, that means you will receive $2,000 per month at full retirement age. Your estimated PIA will be listed on your Social Security benefit statement when you check it each year.

4. Benefits will be reduced permanently if you claim before your full retirement age.

While workers are eligible to take Social Security at age 62, it may be unwise to do so unless you’re ill or disabled, because your benefits will be permanently reduced by 25%, for those born from 1943 to 1954, on up to 30%, for those born in 1960 and later. This is a big deal, because that reduction in benefits will last a lifetime. And reductions also apply to a surviving spouse.

To collect 100% of your Social Security benefit, or PIA, wait until full retirement age. Full retirement age is 66 years old for people born between 1943 and 1954, and moves upward in two-month increments from 1955 through 1960. For anyone born in 1960 or later, it’s 67.

If possible, consider coordinating filing with your spouse, with the lowest-earning spouse taking Social Security at age 62, and the higher-earning spouse filing a restricted application. Caveat: In 2015, the Bipartisan Budget Act eliminated the restricted application option for workers who turned 62 after Jan. 1, 2016. Workers who turned 62 on or before then were grandfathered in, and once they reach full retirement age, they can collect on a spouse’s or ex-spouse’s benefit while their own grows by 8% per year until the age of 70.

Younger workers can still boost their Social Security benefits by up to 32% through delayed retirement credits, yet it’s only one of several claiming options still available. Obtaining the optimal solution for you and your spouse requires coordinating spousal benefits with an adviser who can explain your options and walk you through the numbers.

5. Death and taxes may be certain; but so is an annual earnings test (AET) if you claim early.

Social Security representatives spend about 25% of their time on AET issues, which apply when workers take Social Security before full retirement age. The earnings test applies to all benefits, including spousal, children’s and surviving spousal benefits—with absolutely no exceptions. The 2017 earnings test limit is $16,920 until Dec. 31 of the year you reach age 65. For every $2 earned above this level, $1 of Social Security benefits will be withheld.

The year you achieve FRA, that limit increases to $44,880, and the AET amount withheld will be $1 for every $3 earned. Starting with the month you reach full retirement age, there is no limit on how much you can earn and still receive your benefits.

While we may resist the idea of giving back to the government a portion of Social Security benefits, it is the law of the land. Caesar will have his due.

There are about 76 million Baby Boomers in the U.S. today, and we are turning 65 years old at a rate of 10,000 a day, so there is great need nationwide to learn the basics of Social Security.

Considering that more than half of working Americans have less than $10,000 saved for retirement, according to a 2017 Retirement Savings survey by GoBankingRates, when it comes to Social Security income, a maximized benefit can make a great difference in your personal bottom line.