Americans are an impatient bunch, at least when it comes to Social Security.
People who delay taking Social Security benefits will be rewarded with higher monthly payments, yet hardly anyone waits until 70, the age at which benefits are maximized. Many lock in reduced benefits by not waiting even until their full retirement age, which is between 66 and 67 for most people currently in the workforce. Some start at 62, locking in benefits as soon as they can.
Claiming benefits early is one of dozens of potential mistakes when it comes to Social Security. That should come as no surprise because the system is complex.
"The Social Security system has 2,728 core rules and thousands upon thousands of additional codicils" designed to clarify those rules, write the authors of Get What's Yours, a new book on the topic. Here are three potential blunders.
If you delay taking Social Security, the monthly benefit rises. Yet about 40% of participants begin around age 62, while fewer than 2% wait until 70. Some people need the money now or don't think they will live long. Others wonder if Social Security will remain solvent. Still others fear getting shortchanged. They recognize that they would need to live a long time — often into their mid-80s — before receiving more money from the higher payments that come from delaying. This is a common Social Security break-even calculation, and some people pay too much attention to it.
"It's very beguiling to think if you take benefits at 62 and invest them for eight years ... you end up with a very nice pile of money, and it would take you a long time to earn that money back in the form of higher benefits that you would get if you waited until age 70," Philip Moeller, co-author of Get What's Yours, said in an interview that can be viewed at Morningstar.com.
But dying fairly early, and leaving some dollars on the table, might not be the biggest risk. A greater danger for most people, Moeller said, involves outliving one's assets. "Don't focus on the break-even date," he and co-authors Laurence Kotlikoff and Paul Solman advise in their book. "Worry about the broke date — the date you can't pay all your bills because you took benefits that were too low, too early."
One interesting feature of Social Security is that you might be eligible to receive benefits based on someone else's work history — and they, potentially, can on yours. Joint planning thus becomes important, especially for spouses.
"You can collect spousal benefits instead of collecting on your own record," said Boston law firm Margolis & Bloom in a report. "If your spouse earned considerably more than you, this can be an attractive choice."
Married spouses thus should decide how each person should claim benefits. The exercise can get complicated, but it's worth the effort. When married couples don't carefully plan their strategies for claiming benefits, they could receive reduced payments.
For example, if one partner dies fairly soon after opting to claim early benefits, at a reduced dollar level, it can diminish the spouse's survivor benefits.
According to Grimes, it can be wise for at least one spouse in a two-earner household to defer the receipt of regular retirement benefits. In that case, when the first spouse dies, the survivor would be able to collect a higher Social Security benefit. "Having one earner put off benefits until age 70 ensures that the surviving spouse collects the highest benefits possible," he said.
Not every Social Security decision is set in stone. For example, people can do over, or withdraw, a decision to take benefits early, renewing their eligibility to qualify for higher monthly payments down the road.
Recipients who start benefits early have one year to change their minds. The drawback is that you must pay back any money already received. If you also have had Medicare premiums taken out of your Social Security benefits, you must repay those funds too, Moeller said.
A do-over (withdrawal) means you're starting over, as if you never filed for benefits in the first place. For people who need short-term cash in the form of immediate Social Security benefits but then decide to do it over, "this essentially becomes a one-year, interest-free loan," said Margolis & Bloom.
What if you can't repay the benefits that you received after 12 months have elapsed? An option would be to suspend the receipt of further benefits so that you could start earning credits that would make you eligible for higher payments later. You can suspend benefits upon reaching full retirement age.
For example, said Margolis & Bloom, if you started benefits at 62 then suspend them at 66, you could build up delayed retirement credits from 66 to 70 that would qualify you for higher payments. Benefits rise by 8% a year from 66 to 70, so delaying over that stretch would result in a monthly payment that's 32% larger.
The bottom line is, with Social Security, you have some flexibility. They're among dozens of potentially helpful strategies available.