Social Security Warning: Five Missteps Too Many Women Make

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Filing for Social Security benefits can be a confusing endeavor, and it’s easy to see why.

The Social Security Administration presents us with a labyrinth of rules and specifications, and there are numerous claiming strategies (somewhere in the neighborhood of 567) for determining when and how to take your benefit. For married couples, there are also 81 potential age combinations.

It’s with good reason then that I often see the female clients I work with make any number of missteps that can prevent them from getting the most out of their Social Security benefits.

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Men make plenty of mistakes as well — maybe even some of the same ones — but the majority of my clients are women, so I will focus on what I’ve seen with them.

Here are five common missteps women sometimes make — and that you will want to avoid as you make decisions related to Social Security:

1. Not realizing you can claim your ex-spouse’s benefits

Occasionally, I surprise a client who is divorced when I mention she may be able to collect Social Security benefits based on her ex-spouse’s benefits. Many women don’t realize that.

But depending on their individual circumstances, this extra piece of knowledge can play a significant part in their retirement planning. However, there are caveats:

You must be 62 or older and unmarried.
Your marriage to your ex-spouse must have lasted at least 10 years.
Also, you wouldn’t get the full worth of whatever your ex-spouse’s benefit is. Instead, your monthly benefit would be equivalent to one-third to one-half of theirs.
All of this comes into play only if your ex-spouse’s benefits are higher than the benefit you would be eligible for on your own. For some women, that’s the case — and they come awfully close to missing out on this larger benefit.

This is a misstep that could cost you an average of $111,000 in benefits throughout your retirement, so you want to plan carefully when you are deciding when to start drawing Social Security. For most people these days, the full retirement age is 67.

But you can claim your Social Security benefit as early as age 62 — and 27% of beneficiaries do so. Taking Social Security early might seem like a good idea, but it results in a reduced monthly payment (30% less than if you waited until your full retirement age).

At the other end of the equation, if you postpone claiming until you are 70, your benefit would be 24% higher than if you had claimed at your full retirement age.

Waiting to claim definitely leads to a larger monthly benefit, but what’s right for you? Individual situations vary and other factors, such as health, longevity and marital status, come into play when making your decision, so you will need to consider those as you weigh the options.

Retired couples often both receive a Social Security benefit, but when one spouse dies, one of those benefits is going to stop. The surviving spouse (who usually is the woman) will be allowed to keep whichever benefit is higher — but not both — leading to a significant cut in the household budget.

Once again, this is something you should plan for, so you aren’t caught off guard when the moment arrives.

Social Security is a great supplement to your retirement income, but don’t expect it to replace an entire paycheck. It’s not likely to come even close.

For the average person, Social Security will be equivalent to roughly 39% of what they were earning on the job before they retired.

That’s clearly not enough to maintain the lifestyle you were accustomed to, so you will need income from other sources, such as a pension or savings, if you want to make sure you can pay the bills and engage in the fun activities you want to make part of your retirement.

If you thought you would receive Social Security tax-free, you could be in for a surprise. Yes, a portion of your Social Security benefit can be taxed depending on your overall income.

If you file a federal tax return as an individual, and your overall income is $25,000 to $34,000, you may have to pay income tax on up to 50% of your benefits. Make more than $34,000, and up to 85% of your benefits may be taxable.
For couples filing jointly, if their overall income is $32,000 to $44,000, they may have to pay income tax on up to 50% of their benefits. If their income is over $44,000, then 85% may be taxable.

It’s important to understand the tax repercussions of Social Security so you can plan, especially if you are close to the overall maximum income and another withdrawal from your IRA would take you over.

These missteps and the many other factors related to Social Security can leave your head spinning. And if you believe a quick call to the Social Security Administration will help you clarify what decisions you should make, think again. Workers at the SSA don’t advise people on claiming strategies.

But you don’t have to wander through the complexities alone. A financial professional can review the options with you and help you determine what strategy best suits your circumstances — potentially avoiding these and other costly missteps in the process.

Ronnie Blair contributed to this article.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Disclaimer

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

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Daniela Dubach, a Certified Financial Fiduciary®, is the founder and CEO of Radiate Financial, which helps clients develop a custom financial strategy from a wide array of products, services and approaches. She is also the founder and CEO of Financial Literacy Institute, which has a mission to educate and empower people, especially women, with the information and tools they need to make better financial decisions.