By: Christopher Long CFA ® , CFP ® , AAMS ®
Intentional Wealth Strategies
Article Featured in the Colorado Springs Business Journal Nov. 8th , 2019
Over the years, I’ve learned that even wealthy individuals view filing for Social Security as an arduous task. To help alleviate some the anxiety, I will discuss some misconceptions and offer guidance on how to get the most from your hard-earned retirement benefits.
Myth: Social Security won't be around.
While your contributions go to current beneficiaries, Social Security continues to be replenished by working Americans. It’s also earning interest on its bond portfolio and income tax on benefits paid to higher-income retirees. However, the trustees have projected that any surplus could be depleted sometime between 2033 and 2037, if no further legislative action is taken. This could mean that future retirees may be paid some portion, between 75% and 80% for example, of the benefits promised, but not zero like many people fear.
Myth: Social Security is all you need.
In direct contrast with the first myth, more than half of Americans expect to fund their retirement entirely with Social Security. While benefits get adjusted for cost of living increases, they were always intended to supplement, not replace, retirement savings. Retirees received an estimated average of $1,461 in benefits for the month of January in 2019. Even if you live frugally, that amount is likely not enough to account for all the variables you might encounter over a decades-long retirement. That’s why it’s important to do what you can to maximize all your retirement savings for as long as possible (i.e. take advantage of your employer’s 401(k) match).
Myth: File as early as possible.
No one quite knows how long you’ll live past full retirement age (FRA), and some think you should collect as soon as you’re eligible. However, that means permanently reducing benefits when the odds favor a longer lifespan. Your advisor can help you calculate your breakeven point based on your statistical life expectancy and your family history. Higher earning spouses may want to delay as long as possible, not just to maximize their own benefits, but to ensure a higher payout for their widow or widower when the time comes. Surviving spouses are eligible for 100% of their spouse’s benefit.
Myth: File as late as possible.
For most applicants, waiting past full retirement age to file makes the most sense financially. But there are conditions that warrant filing early, particularly if you need the extra income or if your health isn’t good. On the other hand, retirees who want to have the most income during their prime years may want to file early, too. Should you change your mind, you can claim a do-over within the first year, but you will have to pay back what you received. If it has been longer than a year, you can voluntarily suspend your benefits at FRA and then earn delayed credits until age 70.
Myth: You'll lose benefits if you continue to work after filing a claim.
If you file before your normal retirement age and continue to work, your benefits will be temporarily reduced depending on how much you earn. But those benefits are merely delayed until full retirement age (FRA), not lost forever. Once you reach FRA, you’ll receive increased monthly payments to make up the difference. Plus, you may end up increasing your annual benefit because Social Security is based on your 35 highest years of income.
Myth: You're out of luck if you've never worked outside the home.
It’s true that regular benefits are based on an employment record of at least 40 quarters. But those who haven’t worked for that long, or at all, can receive half of what a spouse or even an ex-spouse would receive (if you were married for at least 10 years and haven’t remarried). If you’re a surviving spouse, you may be eligible for full benefits on your spouse’s record. Even ex-spouses can claim full survivor benefits if they were married for more than 10 years and never remarried before the ex-spouse passed away. Interestingly, remarriage after age 60 does not prevent or stop entitlement to benefits for survivors – even ex-spouse survivors.
Myth: Follow advice from friends and family.
Filing for Social Security based entirely on advice from nonprofessionals may work just fine, but it may not help you maximize benefits, potentially leaving thousands of dollars at stake. A consultation with your financial advisor and accountant can help determine the best strategy.
Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc. and Intentional Wealth Strategies. Intentional Wealth Strategies is not a registered broker/dealer and is independent of Raymond James Financial Services.