$300,000.
I don’t know about you, but $300,000 is a lot of money to me. And that is how much you could be leaving on the table if you choose the wrong income options for Social Security. Now I know most people view Social Security as a retirement benefit that really won’t help much, but that is one of the myths and misconceptions about it. MassMutual, the company I represent, just released a study showing that only 38 percent of all respondents could pass a simple test on Social Security, yet the total amount of the retirement benefit we can expect, for all retirees, will probably exceed $1 million. If you knew you would be getting $1 million and possibly $1.3 million, would you be interested in finding out how the plan works, and what your options are?
The first myth or misconception is that you should take Social Security as soon as you can — even age 62 if possible. In fact the Social Security Administration just released a report that 73 percent of retired workers receive reduced benefits because they filed before their full retirement age.
The reality is that most people should delay as long as possible. If you file at age 62, you will face an earnings test. If you earn more than $15,720 per year, you give up $1 of Social Security benefit for each $2 you earn over that base. So if you are still working and earning more than the base income, you should probably not file for benefits.
But if you are not working, does it make sense to file at 62? The answer depends on other assets you might have as well as your potential longevity. If you come from a family with a history of longevity, and you are in relative good health, then you probably should not file early. It would be better to use other retirement assets and/or keep working if possible and defer filing until full retirement age. That magic number is at least age 66, and increases depending on your date of birth. Also it adds 25 percent to your retirement benefit over the amount you would get at age 62.
So now you are age 66 or at least reached FRA, should you file?
My advice is “no”; defer as long as possible, hopefully to age 70. For each year you defer your retirement income increases by 8 percent, a significant return in any rate environment.
So you plan to wait, what about your spouse. He or she is entitled to at least 50 percent of your FRA amount when they reach FRA, but you have to file for them to claim. So one of the many options open to you is to “file and suspend.” When your spouse reaches FRA you file for benefits, but suspend yours. Your spouse then starts receiving hers and you decide when you want to receive yours. A spousal benefit will never be more than 50 percent of your FRA, and delaying receipt of their benefit does not increase their benefit.
But if their personal age 70 benefit is more than the spousal benefit, they can claim their personal benefit at age 70. This is one of the more than 500 claiming options open to recipients, and points out why all of us need to know as much as possible about our claiming options.
A second myth or misconception is that Social Security is going broke and won’t be here anyway.
We know there are problems and that the benefits need to be “tweaked,” but even if nothing is done, Social Security Will have enough funds in 2088 to pay 75 percent of the promised benefit. I come from a family that lives long, but I don’t expect to be here in 2088 and I suspect you don’t either.
There is no question in my mind that benefits will be there when our grandkids retire, so don’t fall for that myth; Social Security will be here for you and me.
My Advice:
• Know your Full Retirement Age – and your benefit options
• Consider your life expectancy and health
• Think about your income needs in retirement
• When do you plan to stop working?
• Get help if you need it.
Like I said, $300,000 is a lot of money.
Don Bacque has more than 40 years of experience in the fields of insurance, estate, business and retirement distribution planning. Contact him at [email protected].