A whopping 70% of Americans fail to maximize their Social Security benefits.
Why? In most cases, it’s because they’re doing one or more of the following:
Failing to Coordinate Spousal Benefits
Often, married couples don’t realize that they should be working together as a team when thinking about when to take their Social Security.
Too often couples focus on only their own Social Security benefit and fail to recognize that they may be eligible for a spousal benefit of up to 50% of their spouse’s benefit while waiting to claim their own benefits.
Missing these benefits often costs a couple $40K to $50k in lost Social Security benefits. Also, filing the wrong type of application or filing at the wrong time can cost you dearly.
Not Maximizing Survivor Benefits
Again, teamwork is important. Generally, the higher-earning spouse should be especially careful about when to claim Social Security benefits on his or her own record.
This is because the Social Security benefit of the higher-earning spouse is going to be the benefit that lasts the longest for the couple or in other words, is “inherited” by the surviving spouse.
For this reason, pursuing a strategy that increases the survivor benefit as much as possible can make a significant difference. Most couples miss another $70k to $80k by failing to maximize the survivor benefit.
Not Working for At Least 35 Years
Social Security is based on your highest 35 years of earnings history. Continuing to work in retirement can be one of the best ways to increase your Social Security benefits; especially for married couples.
Each additional year of current earnings from work that replace a lower earning year will increase your (and potentially your spouse’s) Social Security. If you have less than 35 years of earnings, the non-working years will be counted as “0” and will lower your overall Social Security benefit vs. having worked at least 35 years.
Just turned 62? Thinking of running to the Social Security Administration to claim your benefits? Hold on. This is by far the single biggest mistake that most Americans make. Many believe that Social Security is almost an “automatic” benefit; turn 62, collect, and don’t think about it again. This couldn’t be further from the truth if you want to maximize your benefits.
There are 2,728 rules in the Social Security Administration’s Program Operations Manual System.
This is basically Social Security’s rule book and figuring out which of the rules applies to you and applying these rules in the best way for your personal situation is the challenge.
And the Social Security Administration can’t help; by law, they are not allowed to provide advice.
Missing Out on Delayed Retirement Credits
So you were wise and decided against claiming Social Security immediately at 62. What’s the upside? Well, a big increase in your Social Security benefits because of what are called Delayed Retirement Credits (DRCs). DRCs accumulate on your record when you wait to claim your Social Security.
And, they accumulate at a substantial rate; 8% per year between 66 and 70. Claiming at 70 vs. 62 means you’ll receive 176% of what you would have received at 62 for the rest of your life and your spouse can benefit from your DRCs as well.
Earning Too Much While Collecting Benefits
Another frequent stumbling block is the Earnings Test. The Earnings Test applies to those who claim Social Security benefits prior to their Full Retirement Age (66 for most people) and are still working and earning an income.
Earning more than $16,920 in 2017 while collecting a Social Security benefit will cause the Social Security Administration to withhold $1 for every $2 in earnings over the Earnings Limit.
While this money is not technically lost (the Social Security Administration credits it to your account at your Full Retirement Age), claiming early and having benefits withheld can present two major problems: 1) Benefits will be withheld so you will not receive all the benefits (if any) anticipated as the result of claiming 2) Claiming early (even if you’re not receiving a benefit because it’s being withheld) will still lock you into the early claim date which means a suboptimal Social Security strategy and less money.
Ignoring the Impact of Taxes
As Ben Franklin has said, there are only two things that are certain in life: death and taxes. Well, unfortunately, Social Security benefits are taxable as well depending on your income.
This can be harmful because without proper planning, taxation can reduce Social Security benefits by up to 30% in some cases! This is called the Social Security Tax Torpedo and should be avoided whenever possible. Whether or not your Social Security income is subject to taxation depends on the level of your Provisional Income. Provisional Income is defined as follows:
Provisional Income =Adjusted Gross Income + Tax-Exempt Interest + 50% of Your Social Security Benefits
Having Errors in Their Social Security Earnings Record
You want to get credit for all your hard work, right? Well, make sure that you check your earnings record with the Social Security Administration on your Social Security statement. It’s important because if there are errors in your earnings record, you won’t receive all of the Social Security benefits that you have earned. If there are errors, you have 3 years, 3 months, and 15 days to correct them. After that, it’s too late.
Not Minimizing Damage When Having Claimed Too Early
If you’ve already claimed your Social Security benefits and now you think you may have done so too early, if you’re under 70, all is not lost. Among other options available to you, suspending the receipt of benefits once Full Retirement Age is attained can minimize the damage as a result of claiming too early. Also, if you’re within one year of your original filing date, there are ways to withdraw your application and start over.
Missing Retroactive Benefits
In many cases it is possible to receive a retroactive Social Security benefit when filing for retirement, spousal, or survivor benefits and this is often missed because it must be requested in order to obtain it. Make sure that you know your options and whether you’re eligible for a retroactive benefit; missing a retroactive spousal benefit in particular is akin to just leaving money in the system.
Social Security Rat Holes
For singles, because the Social Security increases that accumulate between the ages of 62 and 70 do not accumulate evenly, this creates what are called “Social Security Rat Holes” for those that are single.
These are basically suboptimal times to claim your Social Security benefit because of the dip in the formula that is used to calculate what Social Security will pay you.
For those born between 1943 and 1954, one rat hole occurs between 62 and 63 and 11 months and the other occurs between 65 and 4 months and 66 and eight months. In other words, your “Full Retirement Age” as listed on your Social Security statement is directly in one of these rat holes!
The Bottom Line
Making the optimal Social Security claiming decision and maximizing your benefits is complicated. You should work with a Social Security advisor that is an expert in the myriad of strategies that are available to you.
Whether any of the strategies above are right for you requires careful analysis as each situation is different. If you would like to schedule a Free Initial Consultation with an advisor, you can do so by clicking here.
Until next time,
Matthew Allen is the Co-Founder/CEO of Social Security Advisors and creator of the new course Maximizing Your Social Security produced in conjunction with Weiss Educational Services. Matthew has helped thousands of seniors maximize their Social Security benefits and avoid costly mistakes when filing. Matthew has been at the forefront of financial services for over a decade. In addition to co-founding Social Security Advisors, Matthew also founded The Universal Group of Companies, a private investment firm, in 2004. From 2000 to 2004, Matthew was a NYSE Market Maker with LaBranche & Co., a Fortune 500 New York Stock Exchange firm.