7 Social Security Sins
April 25, 2012
Since the first payment was made in January 1937, Social Security has provided a safety net and source of reliable income for retired workers, their spouses and dependents. But getting the most from your Social Security benefits is not always a simple matter of filing as soon as you're eligible.
While you can begin collecting Social Security as young as age 62, your benefits will be smaller than if you had waited to full retirement age (66) or later. But while waiting longer can mean more money monthly, it may result in less money overall if you die early, so selecting the right age to file is a critical component to maximizing your benefits.
Kevin Worthley, a certified financial planner with The Retirement Company of New England, says it is important to make the right decision regarding when to file because there generally are almost no second chances when it comes to Social Security.
"There used to be a strategy called a do-over where recipients could receive benefits early, then years later withdraw their application, repay the benefits received and then reapply for benefits going forward at a higher payout," Worthley says. "The technique was overly-promoted and somewhat abused so the Social Security Administration curtailed the technique recently by only allowing a do-over if implemented within 12 months of the original receipt of income benefits."
So to get it right the first time, avoid committing these seven Social Security sins.
1. Waiting past age 66 to file
Even if you don't intend to collect benefits until after age 66, don't forget to file by the time you reach full retirement age. If you don't wish to collect at that time, simply indicate that you want to suspend your benefits so they can keep growing.
Failing to file by 66 negates the possibility of earning a full lump-sum repayment if you later decide you'd rather have collected those suspended benefits (such as may occur if you suffer health problems in your late 60s). In that scenario, the lump-sum option will award you all you would have collected to that point at once, but this only works if you filed on time.
In addition, using a "file-and-suspend" strategy can also allow your spouse to begin collecting benefits while you continue working.
2. Waiting past age 70 to collect
There is a financial incentive for seniors to delay collecting Social Security past their full retirement age. For each year they wait, their benefits get a bump of between 5.5 and 8 percent. However, there are no additional benefits for waiting past age 70. At that point, any further delay in collecting simply means money lost.
3. Neglecting spousal benefits
Social Security offers several options for spousal benefits, so don't miss this opportunity to bring in some extra cash if you or your spouse is eligible. For example, if you are collecting benefits and your spouse is at least 62 and isn't collecting benefits, your spouse is eligible for a separate spousal benefit. The beauty of this arrangement is that it doesn't diminish your benefits in any way.
"In addition, a spouse who has reached full retirement age and whose spouse is already receiving a benefit can claim a spousal benefit while continuing to work and letting his or her own benefits grow for the future," says Worthley.
4. Forgetting former spouses
After a divorce, the last thing you may want to remember is your former partner. However, if you were married to someone for 10 years and have been divorced for at least two, you are eligible to collect a spousal benefit from the relationship, provided both of you are eligible to collect benefits. However, this only works if you are unmarried when you file to collect.
In addition, when that former spouse dies, you can begin to collect his or her full level of benefits -- just as you would with a current spouse.
5. Assuming you and your spouse should file at the same time
Filing for Social Security doesn't have to be an all-or-nothing proposition for couples. In fact, using a so-called hybrid strategy can be an effective way to maximize the total amount of Social Security benefits your family will receive. One spouse can file for benefits at a younger age while the other waits until later to maximize their benefit level.
"This especially works when the husband's benefit is substantially more than the wife's," says Worthely. "Assuming the wife has a higher longevity expectation, she will acquire his higher income benefit for the remainder of her life. Since women generally live longer than men, this nuance can be important."
6. Waiting too long to collect if you already have health problems
While Worthley counts automatically filing at age 62 as a common mistake, it can be a smart move for those with serious or chronic health conditions. If you don't reasonably expect to live into your 70s, filing early may increase your overall payout.
"That said, remember that medical advances are allowing people to live far beyond their expectations," says Worthley. "So unless your health is debilitating, don't assume your life expectancy will be short."
7. Dying without warning
Remember the bit about later applying for a lump-sum repayment if you deferred your benefits? It doesn't work if you're dead. That means your family will be left out in the cold on those deferred earnings if you don't collect them before you die. While this sin could be harder to avoid than the others, making sure to file by at least age 66 can help make you more prepared.