There are a lot of misconceptions about the Social Security system out there. We know, because when it comes to retirement planning, we have had countless conversations with clients and Social Security personnel in an attempt to make the best decisions possible in conjunction with an overall retirement plan. Over the years, we’ve picked up quite a few nuggets that are key to understanding the choices facing any retiree.
Many people go to file without knowing all of their options, and in some cases, that can result in an irrevocable choice that could cost you thousands down the road. Here are just five of the most common myths about Social Security:
Filing Early is Always Wrong
The first chance to make a decision (for most people) comes when you reach “early retirement age” at 62. Filing then gets your income stream started; however, you will permanently lock in a lower monthly check by filing early.
The logic behind the lower payment comes down to a financial concept called “the time value of money.” In a nutshell, time value of money (TVM) teaches that a dollar today is worth more than a dollar in the future, and we can actually calculate how much more based on certain assumptions. Without getting into the details of the financial calculation, the SSA figures the early retirement amount by assuming you live to the statistically average life expectancy, and then adjusting the amount so that you get the TVM equivalent total amount of money over your lifespan. So, the only way to “win” (i.e. increase your total lifetime benefit) is by waiting to file AND living to longer-than-average life expectancy.
You Have to Have Paid SS Taxes to Get Retirement Benefits
Spouses, widows, and dependent children can qualify for benefits as well, even if they have no history of earned income or FICA taxes paid. Generally, the spousal benefit is one-half of the retiree’s benefit at Full Retirement Age. Widows benefits can be taken as early as age 60, and children have a right to benefits up until they graduate from high school (or reach age 19).
There’s Nothing Special About Waiting until “Full Retirement Age”
The calculation of increased benefits based on waiting to file is updated monthly, so there’s nothing magical about retiring at 62 versus 63, for example. However, there IS something special about waiting until “Full Retirement Age” (FRA). (Your FRA depends on your birth year, but for everyone is somewhere between 65 and 67. Check here for a chart showing when yours will be.)
While waiting to file, in and of itself, doesn’t necessarily increase your lifetime benefits (it depends when you die), it can have positive side benefits in certain situations:
The “File and Suspend” Strategy
This strategy has gotten a lot of good press lately, and for good reason. Ultimately, it results in free additional money being sent your way, so those that fit in this situation will want to know about this provision. The idea goes like this: assume a husband and wife have both worked and paid SS taxes for many years. They both qualify for similar benefit levels, and both of them plan to work well past their FRA.
At FRA, the spouse with the larger benefit files an application with Social Security, then immediately “suspends” payments. His or her benefit continues to grow until age 70 (the latest you can wait to file.) Meanwhile, by filing at FRA (even though he/she suspended payment), the spouse’s benefit becomes available. Both spouses continue to work, and both of their individual benefits continue to grow, all while monthly spousal benefit checks are paid. Then at age 70, both spouses file for their own benefits, which are now 25-35% higher. It’s a win-win situation.
Working Does Not Reduce Benefits
If a retiree elects to take early benefits, he or she should be aware that earned income over a certain amount ($15,480 in 2014) will reduce their benefits. However, during the calendar year the worker reaches FRA, he/she can earn up to $41,400 before benefits are reduced. And, once FRA is achieved, the retiree can earn unlimited income, and their benefits will not be reduced.
My Ex-Spouse has no Claim on My Benefits
This is not necessarily true. An ex-husband or wife can receive spousal benefits if you were married at least 10 years, and they have not remarried. Theoretically, multiple people could be claiming benefits on the same worker’s record, if they were all married to him/her for at least 10 years and did not remarry.
Social Security is Broke
The Social Security system needs some tweaking, that much is sure. But as one of the most popular governmental programs around, it’s not going anywhere while democracy reins. A few minor tweaks to the system such as raising the payroll tax rate, increasing the payroll wage limit, or increasing the age of full retirement would do wonders towards shoring up Social Security permanently. Even under the current rules benefits are projected to still be almost 80% of current levels in 2033, when the SS Trust fund runs out. And while the numbers seem really large, the projected long term deficit is less than 1% of GDP — hardly an unsolvable problem from an economic standpoint. Check out this article for more about Social Security’s long term viability.
So, the takeaway from these common myths is to have a competent professional review your options before you file for benefits. Remember, once you file, you can never “un-file,” so be sure you have examined all your options ahead of time. This is why having a “Personal CFO” is so valuable, because to truly chart the best course through the SS maze, you need someone who is competent, knows your entire financial situation, is a fiduciary (i.e. no conflicts of interest), and can provide an objective opinion.