It may be one of the most consequential retirement choices most of us will ever make, and yet many of us remain shockingly ignorant about some of the specifics involved in that critical decision. The dilemma: how to maximize the earnings we’ll enjoy from Social Security, after paying into that essential program for thirty, forty, or fifty years. It’s a decision that not only affects us but our spouse as well, often for many years after we’re dead and gone.
This week on the Blog, we’re featuring a helpful article from the website of US News in which reporter Brian O’Connell provides us with a list of seven common mistakes many will make as they decide when to claim Social Security benefits. We’ve seen articles like this before, but we think O’Connell does a good job of providing a basic overview. With tens of thousands of baby boomers reaching full retirement age every week, maybe this is the time you’ll take this warning to heart.
U.S. Suffers From a Social Security Knowledge Gap
“There’s a knowledge gap between Social Security and the public,” O’Connell begins, “especially for those Americans who aren’t receiving benefits yet.” As proof, he cites a recent study from The Harris Poll and the Nationwide Retirement Institute, which arrived at a dismal conclusion: Americans are “failing in Social Security education.”
The study, which surveyed more than 1,900 Americans who were not yet receiving Social Security benefits, found that a majority of respondents claim to know how to maximize their benefits. “However, only 6 percent know all the factors that determine the maximum benefit someone can receive,” Nationwide reports. A few other highlights, according to the US News report:
- 39 percent don’t know the eligible age to receive full benefits.
- 51 percent don’t have a clear sense of how much they will receive in Social Security income.
- 30 percent don’t know that Social Security may offer benefits for spouses and children.
- 37 percent incorrectly believe that Social Security benefits are not protected against inflation.
- 45 percent mistakenly believe if they claim early, their benefits will go up automatically when reaching full retirement age – or else don’t know that this belief is false.
There’s Still Time for Millions to Get It Right
“It’s indisputable that Americans across all generations need more Social Security education,” says Tina Ambrozy, senior vice president of strategic customer solutions at Nationwide. “Unfortunately, failing to close the knowledge gap and correct some of these misconceptions can have costly repercussions. Financial professionals must help their clients understand this bedrock of retirement security in America and plan properly to maximize their Social Security benefit.”
As the US News article points out, for those not yet receiving Social Security benefits, there’s still time to re-think your Social Security and avoid costly mistakes. Reporter O’Connell lists what he calls “seven common Social Security snafus” and then provides some corrective thinking. Let’s see if he gets it right.
Mistake #1: Refusing to Ask for Help
Sometimes, as we all know, pride combined with stubbornness makes us do dumb things, like not asking for directions when we’re lost. With Social Security, the dynamic is the same. “Social Security is akin to a 1,000-piece puzzle for most Americans, who have little idea how the program works or how to maximize their own benefits,” O’Connell writes.
For the article, O’Connell spoke with Nick Cantrell of Green Future Wealth Management in Worcester, Massachusetts. “Financial literacy in America is poor in general but especially so for Social Security,” he states. “The government has done a poor job of explaining benefits to workers and has a policy of not offering guidance or recommendations to claimants on how they can maximize their benefits.” As a result, few people seek expert advice before claiming benefits, which Cantrell calls “one of the most damaging mistakes people make.”
Cantrell speaks from experience. “Most people have no idea how to optimize their Social Security income or what the optimal claiming strategy may be,” he told US News. “Even as a CFP practitioner and financial planner for over 15 years who has given dozens of Social Security seminars and calculated optimal claiming strategies for hundreds of people, I still utilize software to help me recommend the optimal Social Security claiming strategy.”
Mistake #2: Not Accounting For Longevity
“One particularly damaging mistake with Social Security is not understanding longevity,” says O’Connell. This causes people to make short-term decisions with long-term consequences.
“Your life expectancy at 62 is much longer than what it was at birth,” says Jeremy Keil, founder at Keil Financial Partners in New Berlin, Wisconsin. “It takes five minutes to go to LongevityIllustrator.org and learn both your personal life expectancy and the odds that you’ll make it to certain ages.” This knowledge should affect how you think about your Social Security claiming strategy, particularly when many retirements last for two or three decades.
Mistake #3: Not Paying Attention to Spousal Benefits
Another big Social Security mistake to avoid, O’Connell writes, is the failure to adequately consider the impact of your choices on your spouse. For millions of couples, spousal benefits are crucial to retirement security. That’s because, when spouse #1 dies, spouse #2 will receive the greater of their own benefit or the deceased spouse’s benefit at death. For some couples, this represents a huge portion of future income in retirement for the surviving spouse.
“If you’re married and you have the higher benefit, your choice is not about you,” planner Jeremy Keil says. “It’s not only about the both of you, it’s most importantly about the widow(er).” After all, the spouse who outlives you may be living on your decision for decades to come, and that reality should color your thinking.
“I haven’t met a widowed spouse that wanted less Social Security money every month,” Keil told O’Connell. “If you have the highest benefit, do what you can to delay claiming and get that higher dollar amount.”
Mistake #4: Failure to Look at the Big Picture
The decision on when to claim Social Security benefits has to be made in the context of many other factors, O’Connell writes, yet many recipients make hasty decisions about Social Security without considering the bigger picture.
Cincinnati-based planner Jim Eutsler told O’Connell that, while delaying benefits until full retirement age or later is generally best, that’s not always true. People whose health status indicates a shorter-than-average life expectancy might benefit from starting benefits early. Similarly, if the future solvency of the Social Security system keeps you up nights, taking early benefits may make sense, although Rajiv would probably quarrel with that logic.
“To optimize your Social Security experience, look at your holistic financial situation, your anticipated tax brackets in future years, the health of you and your spouse and how you’ll fund your lifestyle if you do delay taking Social Security,” Eutsler says.
Mistake #5: Failing to Keep an Eye on Those Statements
It used to be that Social Security sent annual statements in the mail. These days people have ready access online. The problem: people assume those statements are accurate and don’t bother checking. Brian O’Connell spoke with Rose Jimenez, a CFO based in Puerto Rico, who said that too many people fail to review their Social Security statements.
“Social Security sends statements so people can check if their contributions and their company’s dues for them are paid,” Jimenez says. “By not reviewing those documents, there’s a danger as scammers can use your identity and loan money using your Social Security number.” We would add another reason to check statements: future benefits are based on a calculation involving past earnings. If you find a mistake – and it does happen – the sooner you correct it, the better.
Mistake #6: Overlooking the Power of Social Security COLA
One of the great advantages of Social Security (and one that a third of respondents in the Harris/Nationwide Poll survey cited above are unaware of) is that, unlike most annuities and some other retirement vehicles, Social Security benefits are indexed to inflation. This takes the form of the annual cost-of-living adjustments that apply to Social Security benefits.
“COLA additions to Social Security income benefits are an extremely powerful retirement income feature, and the vast majority of participants and even financial advisors are not focused enough on cost-of-living factors,” financial planner Cantrell told US News. The idea here, we think, is that beneficiaries would do well to maximize benefits if for no other reason than the fact that those higher benefits will be compounded with each year’s COLA increase.
Mistake #7: Not Planning Early Enough for Social Security
“By and large,” says O’Connell, “Americans should start planning their Social Security strategy in their early 50s.” As financial planner Jeremy Keil observed, a person’s beliefs about when you’ll take Social Security will affect many other retirement-related decisions.
Keil recommends the simple first step of calculating your personal longevity estimates and probabilities. The Social Security Administration maintains a life expectancy calculator that will tell you the average number of additional years a person with your date of birth and gender can expect to live. Another resource is LongevityIllustrator.org.
Then, he suggests, if you’re in a couple, focus on joint longevity. “Notice how joint longevity is likely about five years longer than each of your individual longevity,” Keil notes. In other words, as stated above, it’s not just about you.
Of course, those who can’t wait can always file for benefits earlier than experts recommend, as early as age 62. Just remember, if you do, you are locking in that lower benefit for the rest of your life – and potentially for your spouse’s life as well. Sounds like some good objective advice is in order.
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(originally reported at https://money.usnews.com)