Be mindful in choosing when to start taking Social Security. Your income depends on it
For something that contributes to the financial security of nearly every retired American, Social Security has a concerning number of complications and misuses. Partly because there are a burdensome 2,700 permutations of claiming rules in the official Social Security Handbook, many recipients realize less financial security than is available.
Nearly two-thirds of all Social Security recipients file early and receive permanently reduced benefits compared to what they are due at their full retirement age (FRA), which is based on birth year. Some people are in poor health or otherwise can’t work and need the income as soon as available (age 62). Others might have more financial security but can’t resist receiving lifetime income at the first opportunity, even if it comes with as much as a 30 percent reduction.
Accepting reduced income to start early is particularly problematic in the case of couples where the higher earner is the one starting early and is likely to die first, meaning that the surviving spouse will continue to receive lower income than could have been available.
Many people are not fully aware of their options or the impact of their choices. It would be wishful thinking to expect a Social Security representative to help determine which options might lead to higher income. Social Security reps are not tasked with helping you determine the most beneficial start date. Their job is to process the claiming strategy that you request. Most claims are now submitted online with no interaction to review the chosen option.
When even experienced Social Security reps are not subject matter experts, it could be helpful to use programs like Open Social Security, Maximize My Social Security or resources available from financial advisors to better grasp the differences in income and the impact on a personal financial plan.
One thing these resources will help pre-retirees understand is that the estimate of future benefits produced annually by the Social Security Administration (SSA) might be too high. For instance, if you are 62 and you review the current estimate for your Social Security income at your full retirement age of 67, the estimate assumes that you would work at your recent annual income up until age 67. If you retire now, rather than fill in the years between now and 67 with more income, the Social Security formula will put $0 in for income each year and your eventual income might turn out to be less than the current estimate.
Your Social Security income is based on your highest 35 years of earned income. If you retire before your full retirement age, possibly during what might have been peak income years, those years are replaced with income from other years, likely when you were young and earning comparatively little.
When you receive your annual benefit estimates statement, in addition to reviewing the estimate of your future Social Security income, it might be beneficial to review your past reported income. The SSA acknowledges mistakes in income reporting on 7 to 8 percent of personal benefit statements. You could report errors, but only up to three years, three months, and 15 days in the past.
If you start Social Security income but realize you should have waited, you have 12 months to file a withdrawal application, pay back any income received and return to earning deferral credits for a larger future payment. Deferral credits become more beneficial after your full retirement age and up to age 70, when maximized. You earn 0.66 percent per month (8 percent per year) higher income after FRA. These higher payments also then provide a larger base for future cost-of-living increases to be applied.
If you wait for higher payments, you would have to live to a break-even point for your patience to have been worthwhile compared to accepting lower payments but starting at an earlier date. Generally, if you do not expect to live beyond about age 78½, then you might realize more income by starting as early as age 62. If you wait until age 70 to maximize payments, you have to live to about age 82 to receive more total income than you would have had by starting early. Typically, this decision should be made in coordination with a spouse’s Social Security options, if applicable.
Unfortunately, you also need to keep an eye out for fraud. Some people who are not currently receiving Social Security income have others claim their benefits and start the income without the intended recipient knowing that a fraudulent claim has been made on their record. Aside from personal monitoring, you can have the SSA use identify verification or add an e-services block on your accounts.
