Not sure about the optimal time to file for your Social Security benefits?  You are not alone.  We regularly get questions from our retired and pre-retired clients about the best time to file for benefits.  Surprisingly, there is not one standard answer.  Some of the factors include your marital status, your age, your anticipated life expectancy, your current wages, and your need for the income.

We find that there are a few common mistakes people are making that can adversely impact their overall income throughout retirement:

• Claiming too early, typically at age 62
• Failing to take advantage of spousal, ex-spousal or survivor benefits
• Retiring prematurely

Social Security benefits and the rules surrounding them are complicated.  In a recent study by Nationwide Financial 76% of people didn’t even know what their full retirement age was (currently age 66 to 67 depending on birth year) and only 8% surveyed knew how the maximum benefit was calculated. Let’s look at these top three mistakes more closely.

Claiming too early

The impact of taking Social Security early (age 62 vs age 70) can cost upwards of $500,000 over a person’s lifetime and yet the most popular age to start claiming benefits is 62.   Full retirement age (FRA) has been gradually increasing from age 65 to 67.  Social Security is structured to punish those who file early and reward those who wait – a bit of the carrot and the stick. When claimed before FRA the benefit is reduced by as much as 30%!   If claimed after FRA, the benefit is increased by 8% per year up to a maximum at age 70.

Additionally, we see many people filing for Social Security while they are still working; this may trigger taxation of benefits and the “earnings test” which reduces benefits if under full retirement age. If you do retire before your FRA it is important to be sure you will not earn any income. It is becoming more common for people to return to work or start a business after they retire. This income may have an impact on social security benefits.

Bottom line: the longer you can wait to start claiming benefits the better, particularly if you are under full retirement age or still working.

Spousal and Ex-Spousal Benefits

When trying to optimize Social Security, couples must consider more complicated scenarios of benefits to the surviving spouse.  In a couple, the lower income earner is entitled to their own benefit or up to ½ their spouse’s benefit, if greater while both are living.  Widows and widowers are eligible for a survivor’s benefit equal to 100% of the spouse’s benefit at full retirement age.  Because women often have greater longevity and may be the lower income earners, this survivor’s benefit becomes particularly important.

Divorcees who were married at least 10 years (and haven’t remarried) are also eligible for spousal benefits.  Even if your ex-spouse has remarried, as long as you haven’t, you can still be eligible for their benefits. Ex-spouses can file for social security at age 62. The benefit is one half of your ex-spouse’s full retirement amount if you wait until your full retirement age. You are only eligible to receive this benefit if it is larger than your own benefit. Earning income can potentially impact your social security benefit even if it is from your ex-spouse’s record. If your ex-spouse is deceased you may still be eligible for benefit as well.

Widows may file as early as age 60 for reduced benefits or wait until FRA for full benefits. If the surviving spouse qualifies for benefits on their own record they can switch to their benefit as early as age 62.

Bottom line: couples should consider their Social Security benefits over the projected lifespans of both parties.

Retiring Early

Social Security is funded through payroll taxes.  Employees and their employer each contribute 6.2% (total of 12.4%) of income up to a maximum income of $137,700 (in 2020).  Although you only need to work for 10 years to be eligible for Social Security, the amount you are entitled to is based on a complicated calculation of your 35 highest income earning years.  For women who may have dropped out of the workforce to raise a family, this may mean that you may have less than 35 years of employment.  This may also be true for those who retire early (such as age 50) or who leave the workforce because of a disability.  If you have fewer than 35 years with earned income, the calculation includes zero income for each of those years short of 35, thus decreasing your benefit.  Conversely, if you continue to work longer in your highest income earning years, your benefit should increase.

Bottom line: review your earnings statement from Social Security carefully.  The assumption for the projected benefit is that you will work until full retirement age.  Early retirement may change your benefit.

Maximizing your Social Security benefits and avoiding these mistakes is critical and complex.  We have knowledge and software to help you make the best decision for you and your family.  Call us to schedule an appointment.