For some, Social Security benefits are only a small part of their retirement income plan. But even so, we all pay into the Social Security system and the benefits will continue as long we live, so it’s a valuable benefit we should not waste.
With that in mind, let’s look at six traps to avoid:
- Collecting benefits too soon. Many people take Social Security benefits as soon as possible, age 62. But it’s an expensive choice.
If you were born in 1960 or later, full retirement age is 67. At age 62, your monthly benefit amount is reduced by about 30 percent of what you would receive if you waited until you are 67.
Generally, it pays to wait to age 70 to start benefits, but it depends on several factors. To fully understand your situation, get in touch with me for a Social Security strategy review. We can help you evaluate your options and select the best path for your family.
- Collecting prior to your full retirement age while still working. If you are younger than full retirement age for the entire year you start collecting, Social Security deducts $1 from your benefit payments for every $2 you earn above the annual limit (which in this case is $17,640 in 2019).
If you wait until the year you reach full retirement age, Social Security deducts $1 in benefits for every $3 you earn above a higher limit. The 2019 income limit in this case is $46,920. Only earnings before the month you reach your full retirement age are counted.
In many cases, if you are working and you are younger than full retirement age, the price of collecting Social Security can be high.
- Not accounting for income tax on Social Security benefits. It’s a bit surprising, but Social Security benefits are subject to tax.
If you file a federal tax return as an individual and your combined income (excluding Social Security) runs between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits. Earn more than $34,000, and up to 85 percent of your benefits may be taxable.
If you file a joint return, the threshold rises to $32,000 and $44,000, respectively.
While having to pay taxes on Social Security at all can be an unpleasant surprise, it’s still a pretty good deal to get at least 15 percent tax free.
- Waiting to start spousal benefits until after full retirement age. The longer you wait to take Social Security, the greater the monthly benefit, up to age 70, except with spousal benefits. The maximum spousal benefit is 50 percent of the other earner’s benefit at their full retirement age, and it does not increase after full retirement age of the claiming spouse.
- Misunderstanding divorced spouse benefits. You might be surprised to know that you can claim a spousal benefit on the earnings record of your divorced spouse.
Eligibility is determined by these criteria:
- You were married for at least 10 straight years.
- You are at least 62 years old.
- Your ex-spouse is eligible for retirement benefits.
- You are currently unmarried.
However, if you remarry, you lose the rights to your former spouse’s benefits unless your new marriage ends, whether by death or divorce.
- Forgetting how your Social Security credits accumulate. You might know that your benefit is based on your earnings history. But you might not know that it’s calculated based on your highest 35 years of earnings.
So, if you are making pretty good money now, and can continue working for a couple more years, you have another great reason to delay claiming your Social Security benefit.
Every year you work at a higher income counts toward higher earnings than one of your current lower 35 years of earnings history. This makes a big difference in your average earnings calculation, especially if you are replacing zero earnings years.
I think it’s pretty clear that it would be easy to trip over one or more of these traps. Social Security is complex, and every family is a little different. It’s worth it to take some time to be sure you have considered your options before you make a claim.
If you would like more information about claiming Social Security Benefits, download my free e-book.
You might also find that you would like to speak with an experienced and highly trained expert about your options. A great place to start looking for the right expert is to talk with a couple CERTIFIED FINANCIAL PLANNER™ professionals.
To find a CFP® professional near you, start your search here.
As you visit with financial planners, I suggest a couple things to check:
- Is the advisor always the client’s advocate – a fiduciary advisor?
- Is the advisor only paid by clients, not any financial product manufacturer or distribution network? That would be a fee-only advisor.
These two points help assure that you are working with a professional who is committed to your best interest at all times. It seems sort of obvious to me that a professional would work in this way, but it’s not automatic.
A fiduciary, fee-only, CFP® professional can help you make great retirement income choices and develop a comprehensive financial plan that is driven by your goals and priorities and addresses all aspects of your financial life. With a big-picture approach, you will be better prepared to understand your options at every step along the way.
Yes, I am a CFP® professional. I’m always a fiduciary and I only work on a fee basis. And yes, I’m still taking on a few great families to be part of my financial planning practice.
If this article has you thinking about maximizing your Social Security benefits, contact my office at rdunn@dunncreekadvisors.com. I am always happy to meet with people who are working on their retirement plans. Dunncreek Advisors does not provide legal or tax advice, nor is this article intended to do so.