If someone offered you a million bucks to put toward your retirement, chances are you’d want to get the best use of this windfall. But David Freitag, a financial planning consultant and Social Security expert for MassMutual, finds retirees don’t think this way about Social Security. “Since it’s listed as a monthly benefit, it doesn’t seem like a big amount. Yet for a couple to generate that same payment in guaranteed, inflation-adjusted lifetime income, they might need a portfolio north of $1.5 million,” he says.
Freitag helps organize an annual quiz from Mass-Mutual that tests the public’s knowledge about Social Security. The quiz, now in its eighth year, has 13 true or false questions. In April, MassMutual tested 1,500 Americans between the ages of 55 and 65 who had not filed for benefits. MassMutual targets this age group because it’s when most people start thinking about Social Security, which can be claimed as early as age 62. The results consistently show the average person knows little about these government benefits, with 65% of quiz takers receiving a grade of D or lower. That’s a problem because what you don’t understand about Social Security could cost you. Here are eight facts worth knowing.
You Can Collect Social Security Based on a Spouse’s Earnings
There are three potential Social Security benefits for married people: the one based on an individual’s own work history; a spousal benefit, which can be up to 50% of what a higher-earning spouse receives at full retirement age (67 for those born in 1960 or later); or a survivor benefit worth up to 100% of a deceased spouse’s last payment. You are entitled to only one benefit — whichever is higher — at a time, and you can claim a spousal benefit only if your spouse has filed for Social Security.
One strategy is to have the higher-earning spouse delay claiming as long as possible to create a larger benefit for themself and a survivor. “If both people claim at 62, it can lead to much lower lifetime benefits should they both live to their life expectancy,” says Wade Pfau, a professor of retirement income at The American College of Financial Services.
It used to be possible to claim the spousal benefit first and give your own benefit more time to grow before switching to it later. Congress, however, eliminated this option in 2015 for anyone born after Jan. 1, 1954.
Benefits Are Reduced If Claimed Early
Although you can claim Social Security as early as age 62, your payments increase 8% each year you delay before maxing out at age 70. Pfau finds many retirees claim as soon as possible figuring they should get something while they can, but doing so locks in a smaller benefit for the rest of your life. It’s especially important to increase your monthly payout if you earn more than your spouse or if you’re likely to live longer.
Waiting Until Age 70 Isn’t Always the Best Move
At the other end of the spectrum are people who delay benefits as long as possible. “A lot of people think they’d better wait until age 70 no matter what,” says Cameron Burskey, a partner and managing director at Cornerstone Financial Services in Southfield, Mich. “During this time, they’re missing out on income that they could use and invest.” For example, someone eligible to receive $2,800 at age 67 forgoes more than $30,000 a year by waiting.
Sure, delaying increases your payment, but it also takes time to break even and come out ahead. The break-even point for someone delaying payments from age 67 to 70 is roughly age 82. Only about half of retirees live that long, Burskey says, adding that his business partner’s father died soon after filing for benefits. “He collected only one Social Security check,” Burskey says.
There’s no single “right” time to claim Social Security. The ideal age generally depends on your marital status, health and the need for retirement income.
Social Security Can Take Back Benefits If You Continue Working
Earned income can reduce your benefit if you’re younger than your full retirement age, but taxable income from a retirement plan or investments won’t affect it. People younger than their full retirement age can earn up to $19,560 in 2022. Social Security reduces the benefit $1 for every $2 you earn over the limit. The year you reach your full retirement age the earnings limit is more generous. Then, you can earn up to $51,960, and Social Security takes back only $1 for every $3 earned over that limit. The month you turn full retirement age, the earnings limit disappears.
This money isn’t lost. You get it back as a larger Social Security benefit once you stop working. Still, the earnings restrictions can spring a nasty surprise on someone who is unaware of the rules. Social Security adjusts benefits based on earnings only once a year, so it takes time before the agency discovers you’ve earned more than the limit and holds some of that money back. “The income starts coming in, gets embedded in your spending, and all of a sudden gets cut off,” says Freitag. Adding to the pain, you also will owe the IRS for all the benefits Social Security paid you before it started cutting some of that money off.
Timing Matters for a Divorce
If divorced, you may be eligible for a spousal or survivor benefit based on your ex’s earnings history when you retire. The marriage must have lasted at least 10 years and you cannot have remarried.
MassMutual added this question to the quiz this year because this situation regularly lands people in trouble. Freitag recalls a nurse who came up to him after a seminar and said, “Today is both a really good and really bad day. The good news is I’ve finally completed my divorce. The bad news is we had been married nine and a half years.” If she could have waited six more months to finalize, she would have qualified for additional benefits, says Freitag.
If you’re going through an amicable divorce and are nearing the 10-year mark, it’s worth asking your soon-to-be ex-spouse to postpone the proceedings until that turning point has passed.
Non-U.S. Citizens Can Collect Benefits
The question people consistently score the worst on is whether non-U.S. citizens can claim Social Security. The answer is yes. “If you’re legally able to work in this country and you pay payroll taxes, those benefits belong to you,” says Freitag.
Benefits Will Shrink If Congress Doesn’t Act
Currently, Social Security has enough money to pay scheduled benefits in full only until 2035. Without additional funding from Congress, payments could drop 20% or more, something that nearly half of MassMutual quiz respondents didn’t realize could happen.
Freitag recommends retirees consider how they might offset a potential drop in benefits. One possibility is to buy an annuity that offers guaranteed income for life. Pfau, however, believes Congress will fix the funding gap. He worries more that people might see the potential shortfall as a reason to claim benefits early, hurting their lifetime retirement income in the process.
Social Security Lets Early Claimers Do Things Over
If you’re already collecting Social Security and wish you had held off, you have a shot at a do-over. If you claimed before your full retirement age, you can reverse the effects by withdrawing your application. “Everyone has one chance to take a mulligan. You can change your mind within one year of starting payments,” says Freitag. You would need to pay back everything you collected from Social Security up to that point, including any benefits a family member received based on your earnings record. Doing so lets you reapply at a later age for a larger benefit.
If you’re past your full retirement age, you can take a voluntary suspension. This pauses your Social Security payments until you restart them; they grow every year you delay. When you suspend, you don’t have to pay anything back, but you will need to cover your Medicare premiums out-of-pocket instead of having them deducted from your Social Security check.