How to Avoid Making A $100,000 Mistake When You Apply for Social Security

Businessman about to step on a banana skin

$100,000 is a lot of money to anyone.  So most people are surprised to hear that at least that amount in benefits could hinge on how much you know when you apply for Social Security. 

In the years that I have helped clients with retirement planning the number one question that I am asked about Social Security is “what age should I file?” Mostly this is looked at as a multiple choice question with only three possible answers. Should it be age 62, 66 or 70?

Sorry, but that’s the wrong question.  In fact, it could be none of the above.

The truth is is that a filing decision goes much deeper than the multiple choice question of “what age should I file?”  A proper Social Security filing strategy is not about just when you file but rather a delicate combination of filing at the right age and filing for the right benefit.

Let’s step back for a moment and look at some Social Security basics.

In general, how much you will receive in lifetime Social Security benefits depends on:

  • your earnings history
  • how & when you elect benefits
  • how long you live

You can’t control how long you live and you can’t go back and change your earnings history so there is only one thing that you really control and that is how and when you elect benefits.

A properly drafted Social Security strategy that is personalized for your situation should tell you exactly when to file and what benefit to file for.

So how do you find out what your strategy should be?  Can’t you just go down to your closest Social Security office and ask them?  Maybe, but would you consider piling all of your tax information in a box and dropping it off at the closest IRS office with a note that said, “Call me and let me know what I owe?”  No, you have a return prepared before you file your taxes.  In the same manner you should have a personalized Social Security filing plan before you file for your benefits.

Review the Basics

The first step in creating your personalized Social Security filing plan is understanding how your benefits are increased and decreased based on your filing age.  For workers born between 1943 and 1954 the Full Retirement Age is 66.  At age 66 you can get the full Primary Insurance Amount (PIA).If you file for benefits prior to that age you will take a reduced payment amount. If you file later than age 66 your benefit amount will grow by 8% for every year you wait up until age 70.

Traditional calculations would use the data above and create a “break even” analysis. This analysis would show you the age at which you would catch up to the other election ages in the total amount of benefits paid. If you think you would live longer than the “break-even” age, you should elect at a later time.

The BIG problem with using this strategy is that it does not consider the two benefits that individuals who are currently married or have been married have available to them; Spousal Benefits and Survivor Benefits.  These benefits are some of the most generous benefits that Social Security provides. Especially if you know how to use the advanced switching techniques to collect a benefit and earn delayed credits (which will increase your benefit amount by 32%) for waiting.  Can you have you cake and eat it too?

Maybe; want an example?  Once you reach full retirement age, some people can use a restricted application to claim a spousal benefit only, while letting your own benefit continue to grow. You would then switch to your own higher benefit amount when you reach aged 70.  At that point your own benefit should be 32% higher due to the delayed retirement credits.

While this is a very simplified view of one of the many advanced options available, you can see that this is a very complicated decision.  I often tell people that although this decision is complex, you should have a basic understanding of the “whys” in doing this planning even if you intend to hire a planner to build a plan for you.

I often compare planning to driving my car; I understand that if I press the accelerator I will begin to move or move faster. Understanding the intricacies of the internal combustion engine is not necessary to perform this basic action. I understand that if I turn the steering wheel my automobile will change direction. However, I do not understand caster angles, steering linkages or the variation of Ackermann steering geometry that my vehicle uses. In short, I have enough knowledge to keep me safe and allow me to perform the basic operations that I need; but when it’s time to dig deeper, I go to a professional.

Where to Find Help?

So where do you turn for advice? One place to start would be to find a financial planner that is knowledgeable about Social Security benefits.

How are you supposed to do that?  Well, you need to interview them.  Maybe that sounds strange, but it shouldn’t.  This decision is simply too important!  There are several questions to ask but you can narrow the field with one easy question.

How much does it cost?

If they offer this planning for no charge, don’t get close!  It’s tempting I know.  But if they offer Social Security consulting for “free” there will most likely be an investment pitch tied to it.

Once they have passed this test it’s time to find out how competent they are.  You should ask them a starter question like, “What’s the best age to file?”  If they give you some rule of thumb answer (e.g. 62 or 66 years old), they DON’T know Social Security beyond a surface level.   Their answer to that question should be something like, “Every situation is different; your best age to file is based on a combination of personal factors.”

If they do ok with that question, hit them with a few more like, “How much will my benefit increase between age 62 and my full retirement age?”  “What is a restricted application?”  “What are the length of marriage rules?”  These are VERY basic questions that any advisor who dispenses Social Security advice will be comfortable and confident in answering immediately.  There should be NO bumbling around or “let me check and call you back” answers on these simple questions.

If they do, look elsewhere!

One thing is for sure; choosing the right Social Security election strategy could be the most important decision of your retirement.  If you make a mistake now it could be devastating; possibly costing you thousands of dollars over your lifetime and impact your loved ones after you are gone.

Before you file, make sure you know your options.

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