While Social Security is a valuable benefit for retirees, filing for it can be downright mindboggling. Aside from the all of the variables to consider and the endless calculations involved, there’s a ton of information—and misinformation—out there that only adds to the confusion.
To help make sense of it all, we’ve outlined four common misconceptions, along with some helpful guidance, so you can get the most from these hard-earned retirement benefits.
Misconception #1: It’s best to file for Social Security at the earliest age possible.
Unfortunately, the age at which you should begin drawing your Social Security is best answered by knowing how long you will end up living. Of course, since none of us knows this critical piece of information, deciding when to dip in those funds is tricky. In most cases, you can choose to start receiving Social Security benefits once you reach age 62. But if you start taking benefits as soon as you’re eligible, the amount you receive each month will be reduced. Your base benefit is calculated based on your "full retirement age," or FRA, which is determined by your date of birth. In 2019, FRAs are achieved at age 67. If you claim Social Security benefits any time before your FRA, you’ll lock in a permanent reduction in your monthly income. Claiming benefits at age 62 results in a monthly reduction of income of 25% to 30%, depending on your FRA, as well as a reduction in survivor’s benefits. That means you’ll receive significantly less monthly Social Security income every month for the rest of your life and so will your spouse if he or she outlives you. You can start by considering your family history and your personal health record. If longevity runs in your family and your current health is OK, you’ll likely outlive the average person. If you’re married and both of you are in good health, the odds are even greater that you or your spouse will outlive the average person. The cost could be quite high if you claim Social Security early and are blessed with a long life.
Misconception #2: I should wait until age 70 to file for Social Security.
As we said above, life expectancy is critical piece of the puzzle when attempting to begin collecting Social Security at just the right time. Generally speaking, later is better when trying to maximize the amount of money you can draw from the system. Waiting to claim Social Security until after your FRA comes with a hefty bonus: 8% additional monthly income per each year you wait, up to age 70. So, if your FRA is 66, your monthly income would increase 32% by waiting those additional years, and if your FRA is 67, your monthly income would increase 24% by waiting. Spousal benefits are another important consideration. Most women will outlive their spouse by about six years on average, and most get their husband’s higher monthly benefit in place of their own. A spouse can increase the monthly benefit his wife will receive as his survivor by more than 20% if he claims Social Security at 66, not 62, and by as much as 60% if he claims at 70. Claiming later could be among the most effective ways a high earning spouse can improve his/her spouses long-term financial security but as we noted, it isn’t the right choice for everyone.
Misconception #3: If I work after I draw benefits, I’ll be penalized.
You’re allowed to continue working after you begin receiving Social Security, but depending upon your age and the amount you earn, it could impact your monthly benefit amount for a period of time. This is known as the ‘earnings test’. Currently, if you’re between age 62 and your full retirement age, you can earn up to $17,640 and not have your benefits temporarily reduced. If you make more than $17,640, your benefits will be reduced $1 for every $2 you make above the limit. In the year you turn your full retirement age, the limit climbs to $46,920, and $1 in benefits is deducted for every $3 you earn above the limit. And once you reach your FRA, there is no limit on the amount you can earn. So for example, if your FRA is 67 and you begin taking benefits at that time, you could earn $70,000 that year and your benefits wouldn’t be reduced.
Misconception #4: I won’t get back all of the money I contributed to Social Security.
In truth, no one gets back exactly what’s put into the system anyway, because Social Security benefits are based on your 35 highest-earning years. But there are earnings limits and nuances involved, and there’s not a precise dollar-for-dollar match of what each worker pays in. Whether you'll recoup more or less than the amount you paid into the system depends on your earnings and how much tax you paid during your career, your age when you claim benefits, whether you're married, and how long you and your spouse live to collect benefits.
Is it time to begin investigating your Social Security claiming strategies? Fortunately, there are plenty of helpful resources to tap into. Online calculators like this one from the Social Security Administration can help you get started. There’s also a wealth of informative material online, such as the Social Security Claiming Guide Center pamphlet by the Center for Retirement Research at Boston College. Still, the best source of guidance is always your financial advisor. Please contact the experienced team at FAI with any questions you may have. It’s always our pleasure to be of assistance.
About FAI Wealth Management, Inc.: Located in Columbia, Maryland, FAI focuses on helping clients create the financial future they desire by protecting their wealth, making the most of their assets, and planning for life's uncertainties. The firm combines fee-only, fiduciary-driven guidance with highly personalized, consultative financial planning and investment services that enable individuals, families, and businesses to navigate complex life transitions. Founded in 1987, FAI currently manages more than $350 million in client assets nationwide. For more information about FAI Wealth Management, please visit the website at https://www.faiwealth.com or call 410.715.9200.