The most trending tax and financial industry issues.

Author Picture

Lane Keeter, CPA

Partner: Tax Consulting, Estate Planning, and Heber Springs Managing Partner

Social Security Decisions That Can Make You Poorer

Recently, a friend/client who is considering applying for Social Security (SS) benefits asked an intriguing question, "Are there any decisions I might make right now that could make my family and me poorer?"

Friends, that's a great question! And the answer is a resounding, yes, there are!

The fact is, for most retirees, SS benefits will account for a large portion (perhaps the largest portion) of their income during retirement, once they begin drawing benefits.

Recently, the Insured Retirement Institute released a report that said 69 percent of Baby Boomers consider SS to be a "major" source of retirement income. This compares to only 28 percent of Baby Boomers who are or expect to receive employer-sponsored retirement benefits.

Other studies show that SS represents at least half of the income for 53 percent of married and 74 percent of unmarried retirees.

Unfortunately, many folks who are now facing major decisions regarding their benefits do not understand fully how SS benefits work. How well you understand things can make a big difference in how much you and your family will ultimately receive.

With that in mind, what are some decisions you can make that, if not made carefully, might lead to, as my friend asked, a poorer you?

Decision #1 - not to check the accuracy of your Social Security Administration (SSA) record. Bad idea! Your benefits are based on your highest 35 years of earnings, so if your SSA record is wrong, so will be your benefits. Please, please, create an online account with the SSA, and check it frequently! If you discover an error, you can request a change, but only within a limited period of time after the close of each year. So checking the record is very important, even if you are not close to retirement.

Decision #2 - to claim benefits before full retirement age (FRA). FRA occurs for most people, depending on when you were born, at age 66 or 67. However, you can actually begin receiving some benefits as early as age 62. The catch is, at age 62 you wonít receive your full benefit and never will. You are effectively agreeing to receive lower benefits for the rest of your life.

It's interesting to note that when SS was first instituted, the average life expectancy of Americans was only about age 61, so it wasn't even expected that most people would ever draw benefits. In that case, it might have made more sense to begin taking early benefits. But these days, with life expectancies dramatically lengthened, you might want to think again. If you at least live out your normal life expectancy (and chances are it will be longer), taking early benefits will leave you poorer.

One final note here, if you elect early benefits but continue working, you could also have benefits reduced due to "excess" earned income until you reach FRA.

Decision #3 - to claim benefits at FRA. Seems like a "no-brainer" right? You reach FRA, you take the money! But it's a common misconception that you have to take benefits at FRA (you don't) and doing so may not necessarily be the wisest choice for all.

You see, if you delay benefits at FRA, the benefit amount increases by 8 percent each year until age 70. So, at age 70, your benefit will be 132 percent of the FRA amount. That's a pretty good, essentially "risk-free" rate of return under any market condition!

Further, this larger amount is locked in for the remainder of your life, with any future COLA adjustments being based on this larger amount, which can dramatically reduce the risk of you outliving your money! We call that risk "longevity risk", and it's a very real problem for today's retirees. By waiting, you buy more "longevity insurance", i.e., protection against financial challenges of living longer than anticipated.

Longevity is also the biggest driver of health care costs. A 65-year-old can expect to pay (at least) $260,000 in health care expenses over a 20-year retirement. Delaying benefits provides higher income at an advanced age when health care costs increase rapidly.

If you are married, there is another important consideration to delaying benefits as long as possible, that being the benefits afforded a surviving spouse, which can be up to 50 percent higher if you delay until age 70. The fact is, for a 65-year old couple, the odds are 50 percent that at least one spouse lives to age 94 and 25 percent that at least one spouse lives to age 98.

In short, taking benefits even at FRA can leave you, and if married your spouse, potentially less financially cared for than if you delay for a few years.

By the way, there is no further benefit to delaying after you reach age 70, as the amounts no longer increase, so taking benefits then indeed is a slam dunk decision.

Decision #4 - to go it alone. Again, bad idea! This decision is too important, and a bad one can cost you tens of thousands if you aren't careful. At a minimum, consult the SSA website for help. Even better, get some advice from a financial professional who knows the issues.

There are so many nuisances and other possible decisions to make that I could go on and on, but space limits me. The point is, don't just assume it is best to take the money and run, so to speak. It actually could make your retirement years not so golden, so be informed.

Prev Next