Every year, millions of Americans rely on Social Security as a primary source of their retirement income. Unfortunately, given the complexities of the program, many are finding out that uninformed decisions made throughout the filing process, can prove costly over time. Whether retirement is around the corner or you have several years of work ahead, here are some common Social Security mistakes that you’ll want to avoid.
Mistake #1: Claiming Benefits Too Early
While there is an element of truth to reports that Social Security funds are estimated to face a tremendous shortfall in the not-too-distant-future, the severity of the situation is quite different than what is being reported. For starters, most estimates show that the funds will continue to meet obligations until around 2034 -- which means that there is still at least a decade before Congressional involvement is necessary to determine an alternative plan.
Even still, if the existing funds are depleted and Congress fails to provide an adequate solution, future tax revenues would provide enough income to sustain paying out around 80% of scheduled benefits through (at least) 2090.
Long story short, claiming benefits early because you think the Social Security program is going to end is absolutely the WRONG move.
A large percentage of people start Social Security at 62. In fact, that is most people's default. When probed, the common rebuttal is: “I’ve waited so long for Social Security, I want to start getting checks right away.”
The problem with that logic is, haphazardly filing for benefits at age 62 instead of waiting until you reach full retirement age, can cause you to miss out on up to ¼th of your payments.
To put that into perspective, if you were slated to receive $1,000 per month at full retirement age (66), claiming benefits at age 62 would earn you $750 per month or $1,320 per month if you held off until age 70.
Mistake #2: You’re Playing to Win the Wrong Game
According to a report by the Center for Retirement Research at Boston College, 90% of Americans begin collecting Social Security retirement benefits at or before their full retirement age.
Why? Because we’re innately wired to come in first place, even if finishing first -- in this context -- doesn’t actually mean ‘winning’.
Allow me to explain.
To many people, retiring early is the pinnacle of success. You’ve worked hard, saved prudently, and now you get to sail off into the sunset and enjoy your life of leisure, right? Sure, that’s a possibility; but it doesn’t always pan out that way.
If you have a nice nest egg in savings that allows you to leave your job before full retirement age, it can be tempting to tap into Social Security early in order to generate an inflation-protected income stream, and avoid relying too heavily on your savings.
However, doing so would mean losing a significant portion of your benefits for the remainder of your lifetime.
“But Andrew, I understand your argument for delaying Social Security, but what if I delay my benefits and die shortly after? I would have only realized a small portion of my lifetime benefits, right?”
Forgive me for being blunt here, but if you delay to 70 then die at 75, you didn’t receive all the benefits that you could have, but who cares? You’re dead! What’s far more dangerous is claiming early and having a low benefit for the rest of your life.
The reality is, with medical advances people are living longer -- and technological improvements seem to be increasing lifespans even more.
Remember, you have control over when you claim, but not when you die. That means, the real losing scenario is to claim at 62 and live long, not claim at 70 and die early.
Mistake #3: You Haven’t Considered Your Other Assets
When trying to figure out how you’ll maximize your retirement income needs, it’s important that you remember to coordinate your Social Security benefits with other retirement income sources such as pensions, qualified retirement accounts (ex: 401k, IRA), personal savings and even spousal benefits.
Speaking of the latter, by failing to coordinate claiming benefits with their spouse, many people are missing out on opportunities that could otherwise optimize their payouts. Often these strategies involve the husband and wife starting benefits at different times -- with the highest earner opting to delay benefits as long as possible, while the spouse claims benefits earlier to have at least some retirement income coming in.
Of course, how you incorporate Social Security benefits into your total retirement income plan will differ depending on a number of factors (ex: marital status, life expectancy, whether you are working during retirement, other assets, etc.). The key to all of this is remembering Social Security is a tool, just as all other assets are tools, and to be most effective, they should work together.
Mistake #4: You Avoid Asking for Help
Try as they may, it’s no secret that the Social Security Administration has a difficult time explaining the details of claiming benefits. This is why so many Americans struggle with questions around when to start taking retirement benefits.
To further complicate matters, a recent report conducted by the Government Accountability Office report found inconsistencies between the benefits explanations in pamphlets, online descriptions and calculators and the information conveyed when individuals met with Social Security representatives in person.
Needless to say, in situations like these, the value of a trusted advisor is paramount. No one wants to run the risk of outliving their money -- especially after working so many years to build up a sizable nest egg.
With our clients, we find the “best” (highest lifetime benefits) Social Security claiming strategy for them -- taking into account their personal situation (things like how long they want to keep working, amount of assets, etc).
Where we offer, perhaps, the most value is in figuring out how to bridge the income gap between age 62 and whenever they start receiving Social Security benefits. For example, if a client came to us expecting $20,000/year in Social Security starting at age 62, but we’re advising them to delay to 66 or 70, we work with them determine how they will be able to make up that “extra” $20,000 in portfolio withdrawals per year of delay?
Our retirement models allow us to visually detail the effects of claiming benefits at 62 vs. delaying until 66 (full retirement age) or even 70.
In addition, we’re able to advise clients on which type of accounts to withdraw from to avoid overpaying taxes, as well as determine what level of portfolio withdrawals is feasible.
Whether you'd like some help creating a strategy for retirement or you're just looking for a second opinion to ensure your plan is on track, we would love to hear from you. Click here to schedule a meeting to discuss your unique situation and see if Fox Financial is a good fit.
