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All Contents © 2020The Kiplinger Washington Editors
By Rachel L. Sheedy, Editor
| March 2015
Social Security benefits are the bedrock of many Americans' retirement income plans, and you can boost your financial security in retirement by maximizing that inflation-adjusted lifetime income stream. Making informed decisions about what kind of benefit to take -- and when -- can boost your total benefits payout. But Social Security has a bevy of complex rules for claiming benefits that you need to understand. An error can be costly. Here are nine mistakes to avoid.
Many people think of retirement age as 65. But with Social Security, full retirement age varies depending on when you were born. For those born between 1943 and 1954, full retirement age is 66. But starting with those born in 1955, full retirement age will gradually rise in increments of two months until reaching age 67 for those born in 1960 and beyond.
Full retirement age matters for two reasons: One, it's the age when you can claim your full benefit with no reduction, and two, it's the age that unlocks a host of claiming strategies that allow you to boost your benefits. A person who claims at age 62 -- the earliest age you can take Social Security retirement benefits -- but whose full retirement age is 66 will take a 25% permanent cut in monthly benefits. For those whose full retirement age is 67, a person who claims early at 62 will take a 30% permanent cut.
And at full retirement age, you can use claiming strategies such as "filing and suspending" and "restricting an application to spousal benefits" that younger retirees cannot. These strategies can help a couple boost their total benefits. At full retirement age, you can also earn as much as you want while taking benefits -- early claimers are subject to an income threshold that can temporarily cause them to forfeit some benefits.
Your Social Security benefit is calculated using your top 35 years of earnings. If you have less than 35 years in your earnings record, perhaps because you were at home raising kids, those missing years of earnings will factor in as zeros. The good news is those zeros can be replaced with a year of earnings, no matter what age you return to work. Even a year with part-time earnings can knock out a zero.
The other piece of good news: Those 35 years don't have to be consecutive. So if you had your highest earning years in, say, your forties, any years of lower-earning work later in life won't decrease your benefit. Say you want to work part-time in retirement after four decades of full-time work, your lower earnings from part-time work will not lower your benefit.
You can also work while taking benefits, and those earnings can be used to boost a benefit. The Social Security Administration reviews earning records of beneficiaries annually. If you had a year of earnings that topped one of the 35 years being used to calculate your benefit, your benefit will be adjusted upward -- even if you are currently taking benefits.
The earliest age you can claim a Social Security retirement benefit is age 62. But if your full retirement age is 66 and you instead take a benefit at age 62, your monthly benefit will be cut by 25% for the rest of your life. So if your full benefit would be $2,000, that's a $500 a month cut for life. If you wait until full retirement age to claim, you will get your full benefit -- $2,000 in this case. If you can wait even longer to claim, you can earn an extra 8% a year in delayed retirement credits until age 70. For someone whose full retirement age is 66, delaying until 70 provides a 32% boost. With a $2,000 full benefit, that's an extra $640 a month.
With life expectancies lengthening, for most people, having at least the higher-earning spouse delay benefits until full retirement age or beyond makes the most sense. That higher boosted benefit will last the lifetime of the longest-living spouse. Of course, in some instances, it can make sense to claim early. Singles might want to claim by full retirement age, and often lower-earning spouses might want to claim early since they will later switch to a higher spousal or survivor benefit.
If you are married, it's not just your benefit you should worry about. Instead, a savvy move is to coordinate the timing of both claims. You and your spouse can bring in some income while maximizing your total benefits. For instance, the higher-earning spouse could delay his benefit until age 70, so that benefit earns delayed retirement credits of 8% a year. In the meantime, the other spouse could take a spousal benefit to bring in some income while the couple waits for the higher earner's benefit to "grow."
But even more importantly, it's critical to consider your spouse's income after your death. If the higher earner delays his benefit until age 70, the surviving spouse at full retirement age or beyond can receive 100% of that boosted benefit, which will adjust for inflation and last her lifetime. And that extra income could go a long way if she lives well into her nineties or beyond.
When you claim a Social Security benefit, you don't actually have to take it right away. You can file for a benefit and then immediately suspend it. But why do that? For a couple of reasons. First, if you're married, your spouse cannot take a spousal benefit without you filing for yours. By filing and suspending, you can unlock the spousal benefit for your wife or husband, while letting yours earn delayed retirement credits. Say a 66-year-old wife's spousal benefit is worth $1,000 but her 66-year-old husband wants to wait to take his benefit at age 70. If he didn't file and suspend his benefit, the couple would be leaving $48,000 on the table while they wait for his benefit to grow.
Singles also can benefit from this strategy. Filing and suspending at full retirement age allows a beneficiary some "insurance" when making the decision to delay. Say you get a serious medical diagnosis, and you decide you need to take benefits at age 68, instead of delaying until age 70. You could choose to get a lump sum going back to the date you filed and suspended. If your monthly benefit at full retirement age was $2,000, that would be a lump sum worth $48,000. If you didn't file and suspend at full retirement age, the Social Security Administration would offer you a lump sum worth only six months of benefits. (To read more about how the lump sum payout works, see Social Security Offers Lump Sum Payouts.)
Making assumptions often gets people into trouble and it's no different when it comes to claiming Social Security. Immediately assuming one strategy will give you more money than another could cost you in the long run. You need to run the numbers for all strategies that apply to you -- or you could end up leaving money on the table.
Say the wife qualifies for a $700 monthly benefit and the husband a $2,000 benefit. Both are at full retirement age and want to maximize their benefits by letting his higher benefit earn delayed retirement credits until he turns 70. With his wife's benefit significantly lower than his, the husband might assume that the best option will be for him to file and suspend his benefit so his wife can take a spousal benefit of $1,000.
Instead the couple could employ the "restricted application" strategy, which in this example would provide a larger total payout. The wife would take her $700 benefit and the husband would limit his application to a spousal benefit only off her record, while letting his own benefit earn delayed retirement credits. Using this strategy allows the couple to bring in $1,050 a month -- $50 a month more until he turns 70. For that 48 months, that's an extra $2,400. At that point, he'll switch to a boosted benefit and his wife can switch to her higher spousal benefit.
If you are a widow or widower, you can claim a survivor benefit off your deceased spouse's record. A survivor benefit can be claimed as early as age 60, but it will be reduced if you take it before your full retirement age.
At your full retirement age or later, the benefit is worth 100% of the benefit amount your spouse was receiving at the time of his death -- or what he would have been eligible to receive if he hadn't yet claimed his benefit. Any delayed retirement credits earned by the time of death will be included in the survivor benefit. And if you remarry after age 60, you can continue to take the survivor benefit.
If you are eligible for a survivor benefit, consider how it stacks up to your own. If delaying your own benefit to age 70 would cause it to exceed the amount of your survivor benefit, you might want to claim the survivor benefit first and switch to your own at 70. Otherwise, if your own benefit is significantly smaller, you might consider claiming your own benefit early at age 62 and then switching to the survivor benefit once you hit full retirement age -- the survivor benefit isn't reduced if you claim your own benefit early.
If you are on the cusp of divorce at, say, nine years and nine months, try to hold off on the date of the divorce decree for another few months. If you are now single but had been married for 10 years or more, you will be eligible for your ex's Social Security benefit. In fact, this can benefit both ex-spouses: If you claim benefits at least two years after your divorce, you can each claim a spousal benefit on the other -- an option not available to couples still married.
Qualifying on an ex-spouse's record lets you engage in some of the same maximizing-benefits tactics that still-marrieds can use. For instance, at full retirement age, you could restrict your application to a spousal benefit and let your own benefit earn delayed retirement credits until age 70. If your own benefit was worth $1,500 and you qualified for a spousal benefit of $1,000 off your ex's record, you could bring in $48,000 if you took the spousal benefit starting at age 66. At age 70, you would switch to your own benefit, which would have grown to $1,980.
When your ex-spouse dies, you can qualify for a survivor benefit off his record, too -- that's worth 100% of what your ex received at death. Using the example above, if the ex-spouse died receiving a $2,000 a month benefit after you had switched to your own boosted benefit at age 70, you could switch to a survivor benefit off the ex's record and get an extra $20 a month. If he too had delayed to age 70 and had been receiving $2,640 a month because of delayed retirement credits, switching to a survivor benefit would up your monthly income by $660.
Years ago, if you claimed Social Security early and later regretted the decision, you could change your mind years down the road. You had to pay back all the benefits you had received, but you could then restart your benefit at a higher amount. The government cracked down on that move, but there are still ways to get a do-over if you claimed early but now wish you hadn't.
If you quickly regret the decision, you can withdraw your application within 12 months of when you applied. You pay back the benefits you received and then restart at a higher amount at a later time. But if you have passed that 12-months mark, you have a few other options. Once you turn full retirement age, you can voluntarily suspend your benefit -- you will forgo payments now but your benefit will earn delayed retirement credits until you restart it again.
As noted previously, working while taking a benefit can also make a difference. If those years of work replace zero or low-earning years in your top 35 years of earnings, your benefit can get a boost. And if you were working while claiming benefits early and lost some benefits to the income threshold known as the "earnings test," there's a silver lining -- those benefits are really only lost temporarily. Once you turn full retirement age, your benefit will be adjusted upward to account for those forfeited benefits.