Social Security Benefits: Timing Is Everything

Not knowing when you will be eligible to receive all of the benefits earned through your work history can hurt a retirement plan, says a recent article from CNBC.com titled “Here’s what to you need to know about claiming Social Security retirement benefits.” Equally problematic? It is letting fears of the program running out of money before you can get your fair share influence your decision.

If you get the timing right and use a combination of your retirement savings and Social Security benefits in the right time and the right order, your money may last as much as seven years longer. However, remember that there are many rules about Social Security and retirement fund withdrawals. Here are three big blind spots to avoid:

Not knowing when to take full benefits.

Age 62 is when you are first eligible to take Social Security benefits. Many people start taking them at this age because they don’t know better or because they have no alternative. If you start taking benefits at age 62, your monthly benefits will be reduced.

There is a difference between eligibility and Full Retirement Age, or FRA. When you reach FRA, which is usually 66 or 67, depending upon your birth year, then you are entitled to 100% of the benefits based on your work record. If you can manage without taking Social Security benefits a few more years after your FRA, those benefits will continue to grow—about 8% a year.

Most Americans simply don’t know this fact. If you can wait it out, it’s worth doing so. If you can’t, you can’t. However, the longer you can wait until when you reach your full amount, the bigger the monthly check.

How many ways can you claim benefits?

This is where people make the biggest number of mistakes. There are many different ways to take Social Security benefits. People just don’t always know which one to choose. First, once you start receiving benefits, you have up to a year to withdraw your application. Let’s say you need to start benefits but then you find a job. You can stop taking benefits, but you have to repay all the benefits you and your family members received. This option is a one-time only event.

Another way to increase benefits if you start taking them early, is to suspend them from the time you reach your FRA until age 70. However, you have to live without the Social Security income for those years.

Expecting the worst scenarios for Social Security.

Social Security headlines come in waves, and they can be disconcerting. However, a knee-jerk reaction is to take benefits early because of fear is not a good move for the long term. There are a number of proposals now on Capitol Hill to strengthen the program. Benefits may be reduced, but they will not go away entirely.

Reference: CNBC.com (Aug. 24, 2020) “Here’s what to you need to know about claiming Social Security retirement benefits”

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If You Plan to Retire This Year, Be Prepared

If you’re sure that you are going to leave the working world and start your retirement life in 2020, better not put in your notice at work until you’ve done your homework. The Motley Fool article “Retiring in 2020? 3 Things You Need to Know” covers three important steps.

If you were born in 1958, then this is the year you celebrate your 62nd birthday—which means you are eligible to collect Social Security. However, if you do, your benefits will be reduced as you have not yet reached your “Full Retirement Age” or FRA. People born in 1958 need to be 66 and eight months to reach that important milestone. At that point, you can collect your full benefit. Collect earlier, and your monthly benefit is reduced for the rest of your life.

Born in 1954 or earlier? Full retirement age for you is 66, if you were born between 1943 and 1954. If if you were born at the tail end of this range, then you can collect your full Social Security benefit this year. However, it still may pay to hold off on claiming benefits.

The longer you can delay tapping your Social Security benefits, the better. From the time you reach your FRA until age 70, your monthly benefit grows by about 8% each year. Few investments today have that kind of guaranteed yield. Some advisors recommend tapping retirement accounts first and delaying Social Security benefits as long as possible. It’s worth taking a closer look to see how this can be of benefit.

If you are planning to retire, but you’re not 65, you’ll need to find and pay for health insurance until you celebrate your 65th birthday. You can enroll in Medicare a few months before your 65th birthday, but if you’re 62, then you have a three-year health insurance gap. Private health insurance is extremely expensive, there’s no way around it. Before putting in that letter to HR that you’re retiring, get some real numbers on this cost. If your employer will consider having you work part-time so that you can maintain your employer-covered health insurance, it may be a good idea.

If you’re closer to age 65, then COBRA is a consideration, although it may still be expensive. Typically, COBRA allows you to retain your existing health coverage if you change jobs, or are fired, for a certain amount of time. However, you have to pay for the full cost of health coverage.

If your gap is only three months, then COBRA might make sense. However, if your gap is a year or more, then you need to be realistic about health coverage options. Pre-existing conditions and a limited marketplace for individual coverage may make this the reason you keep working until 65. You should also check the rules of going from COBRA to Medicare—they may not be the same as going from an employee plan to Medicare.

The more prepared you are for retirement, the more you’ll be able to relax and enjoy this new phase of your life. If these three points have made it clear that you’re not yet able to retire, understand that it is better to work a little longer to reach your eventual goal of retirement, then to find yourself struggling to pay bills and jeopardize a lifetime of savings because of unexpected expenses.

Reference: The Motley Fool (Dec. 28, 2019) “Retiring in 2020? 3 Things You Need to Know”

Be Aware of These Myths about Social Security

Despite everything written about filing for benefits as late as possible, more than half of seniors apply for Social Security before they reach full retirement age. It is now 66 and will rise to 67 for people born in 1960 and later. More than a third of all Americans apply as soon as they possibly can—at age 62. Only one in twenty-five applicants puts off filing to age 70, when monthly benefits max out, says the Washington Post in the article advising readers “Don’t believe these Social Security myths.”

Some people have no choice and must take their benefits early, because they’ve lost their job and have no savings. Others have better options, but they aren’t aware of them. That’s because of the many myths about Social Security. A survey found that while 77% of Americans thought they were pretty smart about Social Security, 95% couldn’t answer eight basic questions about the program.

Let’s look at these myths.

It doesn’t matter when I take Social Security. Benefits increase by about 7% every year from age 62  to your full retirement age, and then by 8% each year between full retirement age and 70. This is a planned adjustment to ensure that people who opt for a larger check for a shorter period don’t receive more than those who file earlier and receive smaller checks. It’s better to delay, both for the larger check and the benefits that the surviving spouse receives. People who live longer can run out of savings, so having a larger check in your 90s could make a huge difference.

If I don’t expect to live a long time, I should claim benefits early. Most of us underestimate our life span. A 65-year old man today can expect to live to 84, and a 65-year old woman can expect to live to 86.5. Life expectancies are even longer for those in their mid-50s. However, here’s the thing: even if one spouse doesn’t live as long, by taking Social Security earlier, their spouse will have a smaller benefit. Married couples lose one of their checks when the first spouse dies, causing a big drop in income. The survivor receives the larger of the two checks the couple was receiving. Therefore, the higher earner in a couple, whose check will be larger, should delay taking benefits, if at all possible, to benefit the surviving spouse.

I can claim benefits early and invest the money to come out ahead. No investment today offers a guaranteed return as high, as what can be obtained from delaying benefits. You’d have to take a lot of risk to get close to the 7% or 8% guaranteed by Social Security.

As soon as I stop working, I have to file for Social Security benefits. Not true. You don’t have to file for Social Security benefits until you want to. Even delaying four years, from 62 to 66, can translate into a sustainable 33% increase in your standard of living.

I better apply before Social Security runs out of money and closes down. This myth becomes more widespread every year. If Congress doesn’t act, which is unlikely, by 2035, the system will still be able to make payments, although they may be curtailed by 20%. Eighty percent of your Social Security check is not zero. It’s also more than likely that Congress will address Social Security fixes.

Reference: Washington Post (June 10, 2019) “Don’t believe these Social Security myths”

Social Security Is Just One Slice of Retirement, Not the Whole Pie

Social Security was never designed as a public retirement plan. It doesn’t provide total income replacement for retirement. Those who expect it to do more than fill in the gaps, are often surprised by this, says Fox Business in the news segment “3 Social Security Realities You Need to Face.” Here are three solid facts that everyone needs to know about what Social Security can and cannot do for retirement income.

Social Security will not cover your cost of living in retirement. Many people actually neglect saving for retirement, thinking they can simply rely on Social Security for expenses when they retire. Social Security replaces less than half of the average earner’s pre-retirement income. Most seniors need about 80% of their pre-retirement income to enjoy a comfortable lifestyle.

Don’t believe it? The average Social Security check is $1,461 a month. That’s $17,532 a year. Could you live on that? Even by cutting back on all discretionary spending, that’s not likely to be anywhere near enough for most middle-class Americans. Even a small amount of money set aside during working years will add up over time. What is the best time to start saving, no matter how old you are? Now.

A Social Security reduction is entirely possible. If Social Security doesn’t have enough payroll taxes to draw from, it’s possible that everyone on Social Security will face across-the-board reduction in benefits in the coming years. There are trust funds available to bridge the gap, but those funds are expected to run dry in 2035. Unless and until Congress acts, there might be as much as a 20% reduction in benefits for everyone.

Therefore, if Social Security replaces about 40% of your pre-retirement income and there’s a 20% reduction, you’ll need even more in your nest egg to pay for your retirement.

Claiming benefits earlier than expected happens often. Social Security benefits are based on the 35 highest earning years, but the amount is calculated based on when benefits are first taken. File for benefits at full retirement age (FRA), and you’ll get the full monthly benefit based on your earnings history. If you file for benefits earlier, benefits are reduced for every month they are claimed before FRA.

Some people are impatient to get their benefits and file early, because they want to. However, many end up filing earlier because they have no choice, knowing that they are getting less every month.

Seniors often stop working in their early 60s, and not always by choice. They may have health issues, be laid off or work in a field that is no longer viable. A new job or a part time job may not pay as much as their previous job.

There’s nothing wrong with factoring in Social Security benefits as part of your retirement cash flow. However, it shouldn’t be the only source of income. Setting aside $200 a month over a 30-year period will give you a $227,000 nest egg, if investments generate a 7% annual return. The ideal is to have a long savings period and to save consistently.

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Reference: Fox Business (June 12, 2019) “3 Social Security Realities You Need to Face.”

What Happens to Social Security when Your Spouse Dies?

Mary is right to be concerned. She is worried about what will happen with their Social Security checks, who she needs to notify at their bank, how to obtain death certificates and how complicated it will be for her to obtain widow’s benefits. Many answers are provided in the article “Social Security and You: What to do when a loved one dies” from Tuscon.com.

First, what happens to the Social Security monthly benefits? Social Security benefits are always one month behind. The check you receive in March, for example, is the benefit payment for February.

Second, Social Security benefits are not prorated. If you took benefits at age 66, and then turned 66 on September 28, you would get a check for the whole month of September, even though you were only 66 for three days of the month.

If your spouse dies on January 28, you would not be due the proceeds of that January Social Security check, even though he or she was alive for 28 days of the month.

Therefore, when a spouse dies, the monies for that month might have to be returned. The computer-matching systems linking the government agencies and banks may make this unnecessary, if the benefits are not issued. Or, if the benefits were issued, the Treasury Department may simply interrupt the payment and return it to the government, before it reaches a bank account.

There may be a twist, depending upon the date of the decedent’s passing. Let’s say that Henry dies on April 3. Because he lived throughout the entire month of March, that means the benefits for March are due, and that is paid in April. Once again, it depends upon the date and it is likely that even if the check is not issued or sent back, it will eventually be reissued. More on that later.

Obtaining death certificates is usually handled by the funeral director, or the city, county or state bureaus of vital statistics. You will need more than one original death certificate for use with banks, investments, etc. The Social Security office may or may not need one, as they may receive proof of death from other sources, including the funeral home.

A claim for widow’s or widower’s benefits must be made in person. You can call the Social Security Administrator’s 800 number or contact your local Social Security office to make an appointment. What you need to do, will depend upon the kind of benefits you had received before your spouse died.

If you had only received a spousal benefit as a non-working spouse and you are over full retirement age, then you receive whatever your spouse was receiving at the time of his or her death. If you were getting your own retirement benefits, then you have to file for widow’s benefits. It’s not too complicated, but you’ll need a copy of your marriage certificate.

Widow’s benefits will begin effective on the month of your spouse’s death. If your spouse dies on June 28, then you will be due widow’s benefits for the entire month of June, even if you were only a widow for three days of the month. Following the example above, where the proceeds of a check were withdrawn, those proceeds will be sent to your account. Finally, no matter what type of claim you file, you will also receive a one-time $255 death benefit.

Reference: Tuscon.com (March 13, 2019) “Social Security and You: What to do when a loved one dies”