The Most Expensive Social Security Mistakes

After decades of paying into the Social Security system, soon to be retirees are eager to start collecting! You’re at the “Finish Line” and ready to leave behind the daily grind! But you have options. And making the wrong decision now can be an irreversible and costly mistake! You’re not across the line yet…pay attention! 

According to the Social Security Administration, you’re allowed to start claiming Social Security benefits as early as age 62.  Do you have visions of travel & leisure in your head? But wait, there are some caveats to collecting early! Claiming Social Security Retirement at age 62 reduces your monthly income by about 25% compared with waiting until your full retirement age! Wow, that’s a whopper of a loss! How unfair!

Rather, waiting a few years until full retirement age though can add thousands of dollars to your payments over a lifetime. Reason being, you don’t actually qualify for all of your earned benefits until you reach “full retirement age,” which is 66 for most Baby Boomers and 67 for those born in 1960 or later.

Did you know though, that by waiting a few years longer, your annual benefits will grow by another 8% for each year you wait up to age 70! That difference can really add up. 

Example: Let’s say 61-year-old Mary, who currently earns $55,000, is deciding when to retire. If she were to file for Social Security benefits next year at 62, she would receive around $15,400 a year, according to the Social Security Benefits Evaluator. If she waits until 66, however, her annual benefits would grow to around $20,500 per year. And if she is able to hold off for several more years, until age 70, her annual benefits would climb to roughly $27,100 per year.

So what does that mean in the end game? Well if Mary lives to be 95 years old, claiming her benefits at age 70 would result in roughly $677,000 in cumulative Social Security benefits (in today’s dollars), compared to the $500,000 or so in benefits that she would receive if she’d filed eight years earlier at age 62. That’s a lot of dinero!   

How about you? Are you on track for retirement?

Still, waiting until 70, or even 66, is not for everyone.  You may be concerned that you won’t live long enough to reap the benefits of waiting for the larger checks. In Mary’s case, if she took benefits at age 70, she would need to live to at least 80 before the payments would result in greater Social Security lifetime benefits. We’ll call that as her ‘Breakeven” point.

Another concern is if you have health issues or are currently  unemployed, then you may not have enough savings to begin with. So just because it could be a better option, doesn’t mean it’s the right option for you.

While singles are only able to control the age at which they file for benefits, married couples (and divorced couples who were married for at least 10 years) have various strategies to consider. Each married partner is typically eligible for three kinds of benefits, depending on circumstances:

1. A retired worker benefit, which are the benefits you accrue over your own working years.
2. A spousal benefit, which entitles you to half of your spouse’s benefits while he or she is still alive. If you have not hit full retirement age, you are only eligible to receive a portion of those benefits.
3. A survivor benefit, which entitles you, once you reach full retirement age, to a deceased spouse’s full benefit. If you have not hit full retirement age, you are only eligible to receive a portion of those benefits.

Couples can increase their annual benefits by coordinating when and how they file for Social Security. In many cases, it may make sense for the lower-earning spouse to file first, while the higher-income earner waits as long as possible. Not only does this strategy result in larger annual benefit checks, it also locks in a higher “survivor benefit” for the lower-earning spouse.

Couples can also consider another strategy, such as the ability to “file and suspend,” which allows one partner to receive spousal benefits while the other partner delays their annual benefits to receive a larger check.

To learn more about the Social Security strategy that makes the most sense for you and your retirement goals, online tools are available, including the Social Security Administration’s Retirement Planner and AARP’s Social Security calculator. I strongly encourage you to consult your financial advisor or accountant prior to taking any action, in order to make the best decision for your personal circumstances.

The information herein contained does not constitute tax or legal advice. Any decisions or actions should not be made without first consulting a CFP, CPA or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.