Social Security, even with all its problems, is unquestionably an important component of retirement income for millions of American retirees. For about half of seniors, Social Security is 50% of their income, and 1 in 4 seniors say it makes up at least 90% of their income.
There are more parts to Social Security than most people realize. Only in the last 10 years, Social Security planning has become widely discussed. And even with all the information available, retirees are making common mistakes that can cost them more than $100,000 or more in lifetime Social Security benefits.
Married couples often leave Social Security money on the table because they fail to coordinate, their benefit decisions. They decide individually when to begin receiving benefits without thinking about what happens when one dies and the surviving spouse has to run the household with one Social Security check instead of two.
Mistake # 1-Not coordinating benefits
In general, a surviving spouse will receive the higher of their own benefit or what the deceased spouse was receiving at the time of death. If both spouses claim benefits before their full retirement age (FRA), both are receiving a permanently reduced benefit and the survivor will receive less than they could have.
If the higher-earning spouse chooses to wait past FRA, say to age 70, that person would receive delayed credits for waiting to begin taking Social Security. Delayed credits amount to approximately 8% more per year for every year you wait past full retirement age before receiving your benefit. At 70, delayed credits stop, so there’s no reason to postpone receiving Social Security benefits past that age. You can begin receiving reduced benefits at age 62, but waiting longer means a larger payout for you, and if you die first, it means a larger payout for your surviving spouse.
Here’s a coordination strategy we created for one of my clients. The wife is 63 and hasn’t worked outside the home in 20 years. The husband is 64 and plans to work to 70 or beyond. His full retirement age is 66 and 4 months. He plans to wait until 70 to begin receiving Social Security benefits, which means his benefit will increase by 8% each year between 66 and 4 months and age 70.
The wife began receiving a Social Security benefit at age 63 based on her own work history, even though it is a permanently reduced benefit. When the husband begins receiving his benefit at age 70, the wife will convert from her own benefit to a spousal benefit based on the husband’s work history. In general, a spousal benefit is half of what the other spouse would have received at their full retirement age. However, in this case, the spousal benefit will be a little less than half because the wife began to receive her own benefit before her full retirement age.
If the husband dies first, the wife will convert to a survivor benefit, which is 100% of what the husband was receiving at the time of his death, which includes the delayed credits.
Based on this strategy, if the wife had not started her own benefit at age 63 and waited to receive the spousal benefit when her husband turns 70, the couple would have left more than $43,000 on the table. If she never converts to the spousal benefit and waits to receive the survivor benefit, even more money would be lost.
Coordinating benefits is imperative.
Mistake # 2-Underestimating life expectancy
Most Social Security recipients claim benefits too early. Some do it because they need the money as soon as possible. Other’s claim early because they’re afraid the Social Security system will go bankrupt. Many claim too early because they underestimate how long they’ll live.
While some people may have a family history of dying early, actuarial tables anticipate people living longer. For example, a 65-year-old man today has a 50% probability of living to age 87. 25% of 65-year-old men today can expect to live to age 93. And one in four women age 65 today will live to age 96. That also shows in financial planning. When I got into the financial world many years ago, we planned based on people living to 82-85 years old. Today we plan based on 90 or older.
With expected ages like that, married couples should consider their joint life expectancy. In 75% of married couples, one spouse will outlive the other by at least five years, and in half of couples, one spouse will outlive the other by 10 years. Don’t underestimate longevity.
Mistake # 3-Don’t depend on the Social Security Administration (SSA)
It’s nice to think that you can get all the information you need from SSA and it will be correct, but don’t count on it. A report from the Office of the Inspector General said more than 9 thousand widows and widowers age 70 and above were underpaid by almost $132 million dollars because Social Security representatives did not inform them they had the ability to take widow or widower’s benefits while delaying their own retirement benefits, which would allow those checks to increase because of delayed credits.
Take it upon yourself to know the basics of Social Security. Knowing the rules puts you in a much better position when you need to talk to someone at SSA. There are lots of independent books you can read. There’s a lot of useful information on the Social Security website along with calculators that will estimate how much you’ll receive at different ages.
Mistake # 4-Not knowing all the benefits you are eligible for
Besides the benefits we’ve already talked about—retirement, spousal, and survivor—there is a divorce benefit. You may be eligible to receive a Social Security benefit based on your ex-spouse’s work history. It’s similar to the spousal benefit and can equal as much as 50% of what your ex would receive at their full retirement age (FRA). To be eligible, you:
- had to be married to your ex for at least 10 years
- divorced for at least 2 years
- you must be at least age 62
- you have not remarried
- your benefit is less than the benefit you would receive based on your ex’s work history
- your ex is entitled to Social Security retirement or disability benefits
Keep in mind, no matter how many benefits you’re eligible for, you’ll only receive one at a time and it will always be the highest benefit you’re eligible for.
Mistake # 5-Not knowing some benefit decisions can change
Everyone needs to know that, in some cases with Social Security, you can change your mind. Let’s say you decide to begin your benefits and then realize it wasn’t the right decision. What do you do? Well, as long as you realize it within 12 months of claiming retirement benefits, you can tell SSA to stop the payments. You file to withdraw your application, pay back the money you’ve received to date, and then you can apply at some time in the future. In the meantime, you’re collecting delayed credits and when you do re-apply, you’ll get a bigger check.
If you miss the 12-month deadline, you can suspend benefits when you reach full retirement age (FRA). Benefits stop until you release the suspension or age 70, whichever comes first. During the suspension, you will receive delayed credits.
If you’re eligible for multiple benefits, you can change from one to the other, for example, changing from individual work history to spousal benefit to survivor benefit. It doesn’t always have to be in that order.
Mistake # 6-Not knowing that Social Security can take back some of your benefit
It’s called the earned income limit and it applies to people who receive benefits before their full retirement age (FRA) and continue to work.
Each year, SSA sets a threshold for how much you can earn and still receive all of your Social Security payout. In 2021 that amount is $18,960. Earn more than that and SSA takes back $1 for every $2 you earn above the limit. Not understanding the earned income limit can put a dent in your retirement income. The good news though, once you reach full retirement age (FRA) the earned income limit goes away and you can earn as much as you want with no reduction of benefit.
Mistake # 7-Not knowing your benefits can increase when you work past age 70
The delayed credits you earn for not taking Social Security at your full retirement age (FRA) stop at age 70. But your Social Security benefit may continue to grow if you continue working past age 70.
The amount of your benefit is based on the highest 35 years of earnings during the years you worked. If you continue working past age 70 and you earn more this year than you did in one of those 35 years, then this year’s income replaces a lower earning year.
For example, if you earn $100,000 this year, and the lowest amount you earned in one of the 35 years was $50,000, then the $100,000 replaces the $50,000 and your Social Security check goes up.
Each year, SSA recalculates the benefits of everyone receiving benefits and still working to determine if the recipient is entitled to a larger payout. The increase takes effect January first, but it takes about 9 months before you see the extra money. You also get a lump sum payment of the money you were entitled to from January 1 to the time the increase takes effect.
Mistake # 8-Not understanding how Social Security is taxed
About half of Social Security recipients pay taxes on their benefit. Whether you pay and how much is based on your combined income, which is the total of your adjusted gross income plus nontaxable interest plus half of your Social Security benefits.
If you are single and have combined income between $25,000 and $34,000, or if you’re married with a combined income between $32,000 and $44,000, you may have to pay taxes on 50% of your Social Security benefit.
If you are single and have combined income above $34,000, or you’re married with combined income above $44,000, you may have to pay taxes on 85% of your benefit.
Mistake # 9-Forgetting to check your Social Security earnings statement
Every year, the Social Security Administration (SSA) issues an earnings statement showing your taxable wages for the year. That amount is used to estimate what your Social Security benefit will be at ages 62, Full Retirement Age (FRA), and age 70. Mistakes happen, so it’s important to check every year and make sure the SSA got it right. Reporting lower earnings works against you, and if it’s not corrected, you’ll end up with less money than you should receive.
SSA won’t let you go all the way back to the beginning to correct mistakes, but you do have a window. According to Social Security, “An earnings record can be corrected at any time up to three years, three months, and 15 days after the year in which the wages were paid or the self-employment income was derived.”
If you discover a mistake, you’ll have to prove it to SSA. You can provide:
- A W-2 form (Wage and Tax Statement
- A tax return
- A wage stub or pay slip
- Your own wage records
- Other documents showing you worked.
Mistake # 10-Missing Medicare registration at age 65
What does this mistake have to do with Social Security? As crazy as it sounds, you don’t sign up for Medicare with Medicare; you sign up for Medicare with Social Security. Because of that, people confuse Medicare enrollment age with Social Security full retirement age (FRA), which is currently between 66-67 depending on when you were born.
Medicare enrollment age is 65, not your Social Security full retirement age (FRA). You enroll during the seven-month Initial Enrollment Period (IEP) that runs three months before the month you turn 65, the month you turn 65, and three months after the month you turn 65.
If you fail to enroll in Medicare Part B and Part D during the IEP and later decide to enroll, you’ll be hit with late enrollment penalties that will last for the rest of your life. One exception is if you continue to work past 65 and are covered by a qualified employer health plan. Once the employment ends and you’re no longer covered by the plan, you have eight months to enroll in Medicare, without penalty.