Social Security has increasingly become a financial necessity for Americans in retirement, mostly because so many workers haven't saved enough money for retirement.
Two recent studies by AARP and the Financial Planning Association show that many Americans nearing retirement are making some big mistakes in handling Social Security. "Overall the results of these two surveys show that Social Security knowledge is lacking for Americans ages 45-64 in ways that could severely impact benefits and retirement decisions," AARP reports. "This includes knowledge around the impact of claiming age, spousal benefits, widow benefits, benefits for ex-spouses and working while collecting Social Security."
Complicating matters are a pair of new Social Security rules recently signed into law that eliminate two claim filing strategies. The legislation, which will go into effect in six months, will eliminate the "file and suspend" and "file and restrict" provisions that have allowed the spouse of an individual to collect benefits even when the other spouse is not collecting them, says Gail Buckner vice president national financial planning at Franklin Templeton Investments. "The Bipartisan Budget Act of 2015 eliminates two claiming strategies that enable a married couple to increase the total amount they could receive from Social Security," Buckner says.
These strategies became available due to the wording of a measure passed in 2000 during the Clinton administration called "The Senior Citizens' Freedom to Work Act." Even with this new legislation, however, there is a small window of opportunity for some folks to still use them.
The new law adds a new layer of complexity to existing Social Security laws.
"Generally, in order to be entitled to a benefit based upon the earnings record of your spouse, your spouse must be receiving Social Security," adds Buckner. "The file and suspend strategy provided a way around that by permitting an individual to file for benefits on his or her own work record but suspending receipt of such benefits until a later date. Generally, the higher-earning spouse would employ the file-and-suspend strategy to maximize the total benefits received as a married couple."
Still, financial consumers need to keep their eyes on the prize, and educate themselves on Social Security withdrawals, so they can avoid potential missteps.
"There are already countless variables impacting the Social Security benefits retirees are eligible to receive, and the new law will undoubtedly leave many feeling lost," says Eleanor Blayney, consumer Advocate for the Certified Financial Planner Board of Standards in Washington, D.C. "However, there are a number of corrective strategies available to those entering retirement that will help them get the most bang for their buck."
Blayney lists several key, and damaging mistakes, consumers make when filing for Social Security benefits.
For instance, not filing for a spousal benefit because you earned more than your spouse can set you back financially. "If you reach your full retirement age during or before 2019 and your spouse has already filed for benefits, you can build wealth by waiting until age 70 to collect your own retirement benefits and filing a claim at your full retirement age restricted to spousal benefits only," Blayney says. "This allows you to collect two benefits sequentially."
Another error - filing at age 62 because you need the income but are no longer working because your benefit will be reduced by the "earnings test." Your benefits may be reduced based on the wages you earn after filing, but they will be repaid at full retirement age pro-ratably over your remaining life expectancy, Blayney adds. "Additionally, continuing to work can have the effect of increasing your annual benefit going forward," she says.
Peter Lazaroff, director of investment research St. Louis-based Plancorp, says the biggest mistake a Social Security recipient can make is just taking benefits prior to the full retirement age, which results in smaller monthly payments. "Monthly benefits increase by 8% for each year that you delay collecting benefits beyond your full retirement age," Lazaroff says. "If you live to your average life expectancy, then you will receive about the same total amount of benefits whether you take benefits early, late, or at full retirement age. But, if you think you'll live beyond the average life expectancy, then delaying payments makes sense."
Lauren Klein, a certified financial planner in Newport Beach, Calif. who specializes in Social Security strategies, advises recipients to look at the so-called break-even point, rather than at one's expected lifetime benefits, when calculating Social Security payout dates and timeframes. "Avoid this by planning with an eye on the long term, and do the math, ideally with the help of a trusted advisor to maximize lifetime benefits," Klein states.
Women, especially, should pay close attention to how much retirement income Social Security will provide since they may need to make their retirement dollars stretch over a long period of time, says Lynn Faust, senior vice president with the Faust-Boyer Group of Raymond James in Greenville, S.C. "If there's a large gap between your projected expenses and your anticipated income, waiting a few years to retire and start collecting a larger Social Security benefit may improve your financial outlook," Faust says.
If Social Security payout formulas seem complicated, it's because they are complicated.
While that's the case, there's no excuse to miss out on all retirement payouts due to your from Uncle Sam. So study up on both old and new Social Security laws, bring in a financial advisor to guide you, and eliminate money-losing mistakes in your retirement.