One of the biggest mistakes retirees can make is to underestimate the importance of Social Security in their retirement planning strategies. In an era of vanishing pensions and volatile markets, Social Security offers government guaranteed income that isn't vulnerable to market risk, can't be outlived, and can provide for your loved ones after your death.
Social Security claiming strategies can be complex and have recently changed with the Bipartisan Budget Act of 2015. Many factors should be considered including health, expected longevity, and earning potential. Here are a few of the pitfalls and mistakes to avoid.
1. Filing too early
Many people believe retirement age is 65. Social Security full retirement age (FRA) varies and is determined by your age. Full retirement age is the age at which you can receive 100% of your benefit.
- Born between 1943-1954 full retirement age (FRA) is 66
- Born in 1955 full retirement age (FRA) rises by 2 months until age 67 for those born in 1960 and later.
If you claim Social Security benefits before FRA they will be a reduced benefit.
- For example if your FRA is 66 and you claim your benefit at age 62 your monthly benefit will be cut by 25% for the rest of your life.
- Every year you wait to claim your benefit past your FRA you earn an extra 8% in delayed credits until age 70.
- Claiming at 70 vs. 62 means you receive 176% of what you would have received at 62 for the rest of your life.
2. Not staying married at least 10 years –Whoops!
If you are now divorced after having been married for at least 10 years, you will be eligible for your spouse’s social security benefit.When your ex-spouse dies you can also qualify for a survivor benefit as well from his record. Again you may be able to switch from your own benefit to the survivor benefit if it is higher.
3. Not claiming a widow’s benefit
If you are a widow, a survivor benefit can be claimed based on your deceased spouse’s record as early as age 60. However, if you wait until your FRA the benefit will be worth 100% of the benefit your spouse was receiving or was eligible to receive at his death. This benefit is eligible to you even if you remarry after age 60. There are planning opportunities to consider when deciding whether to apply for your own benefits first or the survivor benefits. For example, if delaying your own benefit to age 70 would allow it to exceed the survivor benefit you should consider claiming the survivor benefit first then switching to your own benefit later.
4. Not working for 35 years or assuming working longer with a lower salary will hurt your Social Security benefit.
Social Security Benefit is calculated using your top 35 years of earnings. If you do not have 35 years of earnings the missing years will count as zero earnings years. So even part-time lower earnings received later in life increase your social security benefit.
5. Missing out on some of the still available claiming loopholes and associated deadlines per the November 2015 Budget Bill.
- The spouse who is going to file and suspend has to be born no later than May 1, 1950 and must submit their claim on or before April 29, 2016. This represents the 6 month grandfathering window. Under this strategy one spouse files for their benefit at FRA and then suspends. They then wait to restart their benefit at the highest possible value at age 70. In the meantime the other spouse files for a spousal benefit at their FRA if age 62 or older in 2015.
- If your spouse is more than 4 years older and you will reach age 62 by the end of 2015, you are able to file for spousal benefit at FRA and let your own benefit grow to age 70. Even if your spouse will not be age 66 by May 1, 2016, it may be beneficial to take a spousal benefit at FRA and wait to take your own benefit at age 70. Make sure you are using updated commercial software to guide you in this decision.
6. Failing to coordinate with a spouse
Married couples need to think about how their Social Security claiming strategy will affect their spouse’s benefits and income in retirement. Generally speaking a surviving spouse can choose between their own benefit or a survivor’s benefit, depending on whichever is higher. This can be particularly impactful if one spouse is older or earned more in their career. By delaying the start of Social Security payments up to age 70, married couples can increase the amount a spouse will be able to claim as a widow or widower.