12 November 2019

Making Sense Of Social Security: Pitfalls To Avoid

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Each day, thousands of Americans apply for the first time for Social Security benefits. And each day many applicants have no idea what they're getting into.  Here’s a look at some of the biggest issues—involving both the agency and the benefits program—that could shape your retirement for better or worse.

The Social Security Administration isn't your financial adviser. 

The primary job of the Social Security Administration is delivering a service, paying 59 million beneficiaries, and not financial planning. It is your responsibility to learn about the basics: how benefits work, claiming strategies, possible pitfalls. As it shouldn’t, since it is not the agency’s job to know about your household budget, health, savings, life insurance, or other variables that should be factored into your decision about filing for benefits.

The Social Security Administration is stretched increasingly thin at the worst possible time. 

The agency is overextended. In the past three years, it has lost 11,000 employees, or about 12% of its workforce. The budget cuts have resulted in the consolidation of 44 field offices, the closing of 503 contact stations (mobile service facilities) and a delay in plans to open eight hearing offices and one call center. This has led to increased wait times on the 800 number as well as delays in getting an in-person appointment.

More services outside Social Security are offering more help. 

A growing number of tools and services—some free, others for a cost—are available to help people navigate these waters. In recent years, many free sophisticated online calculators help users determine how and when to claim benefits.

The earnings test deters people from working in retirement—and shouldn't. 

Social Security's earnings test, in which benefits are reduced if a person is collecting benefits and income at the same time, generates numerous questions and much confusion. If you are under your full retirement age when you first receive Social Security benefits and if you have earned income, $1 in benefits will be deducted for each $2 you earn above an annual limit. In 2014, that limit is $15,480. In the year you reach your full retirement age, the penalty shrinks; after you reach full retirement age, the deductions end completely. The apparent penalties aren't what they seem and the money lost to the earnings test isn't really lost. Once you reach full retirement age, Social Security recalculates—and increases—your future benefits to account for any dollars withheld.

Spouses, at a minimum, should be aware of three claiming strategies. 

Maximize survivor benefits:  The longer you wait to claim, the larger the survivor benefits.

Claim and suspend: Once you reach full retirement age, you can claim your benefit and then suspend it. This allows for two things: Your spouse, if he or she is 62 or older, can begin collecting spousal benefits from Social Security. Second, your own benefit, when you eventually claim it, will have increased in size.

Claim a spousal benefit, then later claim your own benefit: At full retirement age—if you are eligible for a spousal benefit and your own retirement benefit—you have the option of claiming just the spousal benefit. At a future point in time, you can then jump to your own benefit, which will have increased in size.

"Deemed filing" can box you in. 

Claim benefits before full retirement age, and your options are limited; claim benefits after full retirement age, and you have more flexibility—and bigger payouts. It's a frequent question: A husband who is already collecting Social Security (or weighing the claim-and-suspend strategy) asks if his wife can take just a spousal benefit at age 62—and then switch to a (presumably larger) benefit based on her earnings record in the future. The answer: Nope.

If the wife, in this case, applies for benefits before her full retirement age, she is "deemed"—in the eyes of the Social Security Administration—to have filed for both benefits: the benefit based on her work record and a spousal benefit.

She will receive the higher of the two figures, but she will be locked into that reduced benefit going forward. (Reduced because she is claiming benefits before full retirement age.)

Divorced spouses and survivors don't know what they don't know. 

Always err on the side of telling Social Security about your family circumstances and/or a change in those circumstances. Telling the agency about ex-spouses, deceased spouses, or children can have an impact and make you eligible for additional benefits.

Delaying Social Security doesn't just result in a bigger benefit; it also can make good tax sense. 

If you delay claiming Social Security and, as a result, end up with larger benefits, future withdrawals from savings will likely be smaller—a recipe for lower levels of taxable income. This is because as much as 85% of a married couple's benefits are subject to tax when their income exceeds $44,000 ($34,000 for individuals); as much as 50% of benefits are taxable at lower income levels.

Click here for the full article on The Wall Street Journal.

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