Every so often we think it’s a good idea to revisit a common topic that is both vitally important to retirees and widely misunderstood: Social Security. These benefits constitute the bulk of the income for millions of retirees, yet year after year people make mistakes that end up costing them and their surviving spouses tens or even hundreds of thousands of dollars. When we came across this recent Kiplinger article about this issue, we wanted to share it here on our AgingOptions blog. “Social Security is a complicated element of anyone’s retirement plan,” says Kiplinger. “Here are the most common mistakes individuals tend to make and how to avoid them.”
To Maximize Social Security, Understand Its Importance
First, let’s consider a bit of background that will put Social Security’s importance into better perspective. According to stats we found in this article from the Motley Fool website, there are presently more than 66 million Social Security beneficiaries nationwide, a figure that is growing rapidly with the aging of the population. More than 60 percent of those recipients rely on the program for half of their income or more, and for about one-third of beneficiaries, Social Security – whose average monthly payment is less than $1,400 – makes up 90 percent or more of their income. That’s a huge segment of the elderly population completely reliant on Social Security payments to pay their rent, buy their food and cover their utility bills. It’s safe to say that every American, retired or not, has a stake in the security of this essential program.
Even so, says Kiplinger, a significant number of people preparing for their retirement years continue to make uninformed choices about Social Security. “If you’re older than 55, Social Security planning comes front and center as you think about your retirement income picture,” the author, Scot Landborg, writes. “When should you take it? How do you optimize your benefit? How will it affect your taxes?” Landborg offers these “Seven Most Common Social Security Mistakes” as a warning to those not yet drawing benefits to do some homework and some advanced planning before flipping the switch and starting your benefits early. Here are the seven Social Security blunders as reported by Kiplinger.
To Maximize Social Security, Avoid These Mistakes
- Starting Benefits at 62: We think this point is obvious, yet millions ignore it. “Collecting your Social Security too early is a common mistake,” says Lundborg. Without a solid plan, “you might think that taking the government benefit as early as possible would make sense,” but it’s a poor strategy for most people because you lock in lower benefits, not just for you, but potentially for your spouse if you are the higher wage earner.
- Missing Out on the Restricted Application Strategy: We won’t go into detail here but this is a way for qualifying spouses to claim spousal benefits while deferring their own until age 70. This benefit disappears in 2019, and there are age requirements and other restrictions, but it might be worth discussing with your financial adviser if you qualify.
- Remarrying Without Understanding the Consequences: Again, the issue of divorce and remarriage is filled with ramifications for Social Security beneficiaries. Before you tie – or untie – the knot, make certain you find out just what those consequences are for you.
- Delaying Spousal Benefits Until Age 70: Most people know that benefits for a wage earner go up about 8 percent for every year he or she delays starting benefits from full retirement age to age 70. But spousal benefits do not keep rising – they are generally calculated based on the amount the higher wage earner would be qualified for at full retirement age, generally between 66 and 67. Delay taking spousal benefits past full retirement age and you’re leaving money on the table.
- Collecting Benefits Early Because You Expect to Die in Your 70s: Beneficiaries sometimes rationalize taking early benefits because they don’t expect to live past the “break-even” point at age 82 or 83. But they are neglecting the benefits for their husband or wife of waiting. “People often forget that when one spouse passes away, the lower Social Security amount disappears,” says Kiplinger. “The surviving spouse keeps the higher of the two benefits. The increase in benefits you receive by deferring might not just be for your life but for the life of your spouse as well.” It’s often another valid reason to delay.
- Neglecting to Plan for the Death of a Spouse: This difficult topic is important in the financial planning process, says Lundborg, especially when it comes to Social Security. “When one of you passes away, you’re left with only the higher of the two benefits,” he writes. “Early in retirement, if one of you passes away, the lower income can become a planning problem. Make sure to address this possibility with your financial professional.”
- Failing to Understand How Social Security is Taxed: Again, we’ll skip the details, but it always surprises us to hear how many people assume their Social Security benefits are not subject to federal (and often state) taxes. If your annual income exceeds certain modest thresholds, you will find that somewhere between 50 and 85 percent of your Social Security income will be taxable at whatever bracket you’re presently in. “Tax planning is an integral component in Social Security planning,” says Kiplinger. “Consult with your tax professional to review how your taxes might change in retirement. Make sure you do everything you can to maximize your benefits and avoid potential pitfalls.”
To Maximize Retirement Security, Plan Comprehensively
The Kiplinger article points out why a solid financial plan is certainly very important for someone preparing for retirement. However – and we can’t over-emphasize this point – a financial plan by itself is completely insufficient. The only way for you to ensure that you’ll enjoy the retirement you want is by planning comprehensively, and that means you need a LifePlan from AgingOptions.
Only our LifePlanning approach blends financial planning with legal protection, medical coverage, housing plans and family communication, so that all the “retirement gears” mesh properly. This interdependent approach to retirement helps you protect your assets, avoid becoming a burden to your loved ones, and escape the dismal trap of being forced against your will into institutional care. That’s the power of an AgingOptions LifePlan. To find out more, without cost or obligation, join Rajiv Nagaich at a free LifePlanning Seminar. These popular events are held throughout the region, so register here for the seminar date and time of your choice, or call our office during the week. Let us be your guide toward a fruitful and secure retirement.
(originally reported at www.kiplinger.com)