Couples often make Social Security claiming mistakes. While they may think about their Social Security benefits and how to maximize them, they often overlook the importance of considering Social Security benefits as a couple. This week’s blog will focus on the primary Social Security claiming mistakes couples can make and offer suggestions to help avoid them.
1. Failing to make decisions jointly.
One of the most common Social Security claiming mistakes couples can make relates to making decisions on an individual basis rather than as a couple. While we earn benefits on an individual basis, claiming decisions should consider both members of a couple. Spousal and survivor benefits should also be factored into the decision.
You can start claiming benefits as early as age 62 or as late as age 70. Importantly, Social Security benefits increase when you delay starting them. If you were born in 1960 or later, your full retirement age (FRA) for Social Security purposes is 67. Assume that your FRA benefit would be $2,000 per month. If you start collecting benefits at age 62, you will receive 30% less – $1,400 in total – than you would receive at FRA. If you wait until age 70, your benefit will increase another 8% per year. This means that if you wait until age 70, you will receive $2,480 per month. That represents a 77% increase.
Generally, the higher earner’s decision to wait until 70 makes sense as long as one of the spouses lives until 82. If the age difference between spouses is wide, and the older spouse is the higher earner, waiting until 70 can help even more. Remember that the surviving spouse receives the higher of the two benefits the couple earned.
In short, Social Security benefits represent a joint asset for married couples. Informed decisions based on the couple’s combined financial situation should rule the day.
2. Confusing Spousal and Survivor Benefits.
Another common Social Security claiming mistake is confusing spousal and survivor benefits. A non-working spouse can claim spousal benefits. Survivor benefits are available to a surviving spouse after their spouse passes away.
You can receive spousal benefits based on your partner’s work record. To qualify for spousal benefits, a couple must be married for at least one year, and the spouse claiming benefits must be at least 62 years old. A spousal benefit can be up to 50% of the benefit amount your spouse is entitled to at their full retirement age. Note that your spousal benefit does not increase if your spouse waits until age 70 to start claiming benefits. It also does not increase if you start collecting it past your FRA.
On the other hand, a surviving spouse receives survivor benefits if their spouse passes away. To qualify, a couple must have been married for at least nine months before the first spouse’s death. A surviving spouse can claim benefits as soon as age 60 – age 50 if they are disabled. Caring for the deceased’s child who is under the age of 16 or disabled, can also qualify you for survivor benefits. The survivor benefit can be up to 100% of the benefit amount received by the deceased spouse.
A surviving spouse can claim survivor benefits even if she was not eligible for spousal benefits while her spouse was alive. Divorced spouses who were married to the deceased for at least 10 years and meet other eligibility requirements may also qualify for survivor benefits.
One key difference between spousal and survivor benefits is that survivor benefits are not subject to early claiming penalties. In other words, the surviving spouse can claim benefits as early as age 60 without a reduction in benefit amount, while spousal benefits may be reduced if claimed before FRA.
This article provides more information on qualifying for Social Security spousal and survivor benefits.
3. Claiming Benefits too Early.
If you start claiming benefits too early, you may be making another Social Security claiming mistake. The following represent some important ways in which claiming early can negatively impact your benefits:
a. Reduced Benefit Amount.
Claiming Social Security benefits before FRA permanently reduces your benefit amount. For example, if your FRA is 67 and you start claiming benefits at age 62, your benefit amount will be 30% lower.
If you retire early and start collecting your benefits before FRA, your benefit is reduced by 5/9 of one percent for each month before FRA, up to 36 months. If the number of months until FRA exceeds 36, then the benefit is further reduced by 5/12 of one percent per additional month. (See here for more information.)
In addition, your benefit grows by 2/3 of one percent for each month you wait to start claiming benefits from FRA until age 70.
b. Lower Lifetime Benefits.
Because claiming early permanently reduces your benefit amount, you may receive less money over your lifetime than if you waited to claim. The problems this can cause become exaggerated if you live a long time and have fewer other sources of income.
c. Decreased Spousal Benefits.
If you’re married and claim benefits early, your spouse’s potential spousal benefits could also be lower. This can have a meaningful negative impact on your household’s income over time.
d. Limited Earning Capacity.
If you claim Social Security benefits before your FRA and continue working, your benefits may be reduced if you earn more than $21,240 in 2023. If you reach FRA in 2023, the limit on earnings for the months before FRA is $56,520. You lose $1 in benefits for every $2 you earn above the limit. If you reach FRA this year, you lose $1 for every $3 you earn more than the limit.
4. Failing to Account for Taxes.
Depending on how much you earn, Social Security benefits can be taxable. Failing to consider the tax implications of claiming benefits at different times can be another Social Security claiming mistake. The amount of your Social Security benefits that are subject to income taxes depends on your income and filing status.
For married couples filing a joint return with a combined income of $32,000 to $44,000, up to 50% of your Social Security benefits may be subject to income taxes. If your combined income exceeds $44,000, you may pay income taxes on up to 85% of your benefits.
For singles, up to 50% of your benefits may be subject to income tax if your income falls between $25,000 and $34,000. If your income exceeds $34,000, up to 85% of your benefits may be subject to income tax.
Since the taxability of your Social Security benefits varies with income, there can be times when increasing your income above a certain level can magnify the amount of taxes you pay on your Social Security income (see Social Security Tax Torpedo).
Delaying benefits can also allow you to implement other tax planning strategies that will help improve the overall tax cost of withdrawing funds from your tax-deferred accounts. For example, the period between retirement and when you must start withdrawing money from your IRAs/401ks can represent a fertile time to complete Roth conversions. If you delay Social Security benefits until age 70, you may have additional flexibility in completing Roth conversions as well. (See here, here, and here for more on the potential benefits of Roth conversions.)
5. Assuming a Non-Working Spouse Is Ineligible for Spousal Benefits.
Not knowing that a non-working spouse can still collect Social Security benefits represents another Social Security claiming mistake. Regardless of their work history, a lower-earning or non-working spouse can still claim a spousal Social Security benefit at their FRA. This benefit equals 50% of the higher-earning worker’s benefit at their FRA (also called the primary insurance amount or PIA).
If the lower-earning spouse’s benefit is less than 50% of the higher earner’s benefit, the lower earner will receive their benefit plus a supplemental amount that makes their overall benefit equal to one-half of the higher-earning spouse’s PIA.
Note that if the lower earner claims their benefit before their FRA, their benefit will be adjusted such that it is less than 50% of the higher-earning spouse’s PIA.
6. Failing to consider income replacement rates.
Not considering income replacement rates represents another Social Security claiming mistake couples can make. Remember that Social Security benefits are not designed to fully replace our income in retirement. Therefore, it is crucial to consider other sources of income such as pensions or retirement savings.
The income replacement rate refers to the percentage of pre-retirement income that retirees can replace with their retirement income, including Social Security benefits.
If a couple relies too heavily on Social Security benefits as their primary income source, they may not save enough to maintain their pre-retirement standard of living and experience financial hardship in retirement.
Claiming benefits too early will lead to an even lower income replacement rate, further magnifying the negative impact of the decision to start receiving benefits too soon. It can also lead to lower spousal benefits.
In addition, failing to consider income replacement rates can also indicate inadequate planning for retirement. Couples should plan for their retirement by taking into account their expected retirement expenses, available sources of retirement income, and claiming strategies for Social Security benefits. In other words, consider the whole picture. You don’t want to make any of these decisions in isolation.
7. Thinking Social Security Will Disappear.
Some may consider this one controversial. Thinking their benefits may disappear can cause people to start claiming too early. While it may not seem like it on the surface, this could be another mistake. Why? It can lead to some of the Social Security claiming mistakes outlined above. For example, it can cause couples to start claiming benefits too early.
A Google search for “Will Social Security run out” generates about 1.5 billion results. In other words, many people are concerned about this issue. Many worry the Social Security program will disappear at some point in the mid-2030s when the trust funds are depleted. But those working at the time will still contribute to the fund. Absent any changes, this would result in benefit cuts in the range of 20% to 30%.
However, it seems safe to assume that Congress will eventually take action to put the program on solid ground for the long term. First, consider that for many, Social Security benefits represent a key element of their retirement income. Do you think politicians would want to explain to voters why they let the Social Security system collapse while they were in office? That doesn’t sound like a message that would help them remain in office. If we consider that older voters show up at the polls in the greatest numbers, the odds fall even further.
Final Thoughts on Social Security Claiming Mistakes
In conclusion, Social Security benefits are a joint asset for married couples. As a result, they must make informed decisions based on their combined financial situation. By avoiding these common Social Security claiming mistakes, couples can maximize their Social Security benefits and improve their chances of a secure retirement.
Please keep in mind that, on average, women live longer than men. Plus, the average husband is older than his wife. This can make Social Security claiming mistakes even more damaging for women. (See also 5 Facts Every Woman Should Know About Social Security. You can also find additional content focused on women by downloading Apprise’s free e-book.)
I hope you find the above discussion helpful. If you have questions or would like some help determining how you can optimize your Social Security claiming decisions, please schedule a free call. I’ll gladly answer any questions and assist in whatever way I can.
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Phil Weiss founded Apprise Wealth Management. He started his financial services career in 1987 working as a tax professional for Deloitte & Touche. For the past 25+ years, he has worked extensively in the areas of financial planning and investment management. Phil is both a CFA charterholder and a CPA.
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