The Biggest Mistake People Make When Filing for Social Security

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Sixty-six percent of retired Americans rely on Social Security for the bulk of their monthly income.

Yet, the majority of adults remain unaware of how to maximize their Social Security benefits, according to a recent survey conducted by the BMO Retirement Institute, a financial research group.

The action that will affect your benefits the most

When it comes to Social Security, the most important decision for retirees is when to begin collecting benefits.

"It's the biggest issue for people, everyone wants an answer to the question: At what age should I collect?" says Jeremy Kisner, C.F.P., a financial planner and author of, "A Good Financial Adviser Will Tell You."

Many older Americans start collecting their checks too early.

About two-thirds of Americans file for Social Security at age 62, according to Kisner. This is the earliest a person can begin collecting, and is several years before the cut-off for receiving full benefits, known as the "full retirement age" (FRA).

Collecting before FRA—which ranges between 65 and 67 years, depending on when a person was born—could cost an applicant tens-of-thousands of dollars in lost benefits.

Why do so many people prematurely cash in on Social Security?

The BMO report cites several possible reasons, including: needing the extra income, having to make too many complicated decisions (i.e. When should I retire? Will I need to work part-time? etc.), not knowing how to make the most of their benefits and fearing that the Social Security program will run out of money.

Anthony Criscuolo, C.F.P., a financial planner with the Palisades Hudson Financial Group, cautions prospective retirees not to pull the trigger on collecting Social Security because they are worried the plan is going bankrupt. "I would not take early benefits for fear that the program will run out of money," he says. "That is not a good strategy as it incurs harm due to fear of a very unlikely event."

Tips to boost benefits

Kisner and Criscuolo offer three strategies that retirees can use to maximize their Social Security benefits:

  • Wait to cash in: Waiting to file until you reach FRA may boost your lifetime Social Security benefit amount by as much as $25,000, if you live to be at least 85 years old, according to the BMO report. This number jumps to $61,000 if you reach age 90 or older. Postponing your application until age 70 can earn you an additional eight percent increase in your overall benefits, per year, by taking advantage of "delayed retirement credits." It may not be possible for a retiree to wait until they're in their 70s to start collecting, but it's important to at least try and avoid filing before FRA. All is not lost, even if a person files prematurely and then decides they don't need the additional monthly income. Everyone who applies for Social Security has a 12-month window where they are allowed to suspend their benefits and pay back whatever they have collected without incurring a penalty.
  • File and suspend: Filing and then suspending the benefits of the highest-earner in a married couple can allow their partner to collect a "spousal benefit"—up to 50 percent of a spouse's monthly Social Security benefit—while the higher income spouse avoids collecting their benefit so it will accumulate delayed retirement credits. Of course, this requires a husband and wife to live off of only one set of benefits for a few years. Couples who choose to employ this strategy should have access to additional savings and investments to supplement their income. Here's how it works: in order for a person to be able to collect a benefit based on their spouse's income, that spouse has to file first. However, this doesn't mean that first applicant actually has to collect their benefit. People who file for Social Security after they reach FRA can still choose to suspend their payments until they turn 70. For example, say Mike and Beth are married and have reached FRA. Mike is eligible to receive $2,000 a month from Social Security, while Beth could get $700. Mike would file first, so Beth could collect a spousal benefit of $1,000 (based on his income) as opposed to sticking with her normal benefit of $700. After Beth files, Mike would suspend his application. Beth would still be able to receive $1,000 every month, even though Mike has stopped collecting his checks. At 70, Mike will re-activate his benefits, which will have increased by about 8 percent for every year he held off collecting after he reached his FRA.
  • Restricted application: People who're married (or divorcees that meet certain criteria) can have their cake and eat it too by restricting the scope of their Social Security application. If a couple needs money, but they don't want to cash out both of their policies at the same time, one of them can file for full benefits, while the other uses their spousal benefit to piggyback off of their partner's income. Then, when the person receiving the reduced amount reaches age 70, they can switch their spousal benefit to a full benefit based on their personal lifetime earnings. This strategy only works if the person applying for the spousal benefit has reached their FRA, and can thus obtain what is called a, "free spousal benefit," without impacting their own personal Social Security benefit. Anyone collecting a spousal benefit before their FRA is automatically assumed to also be filing for their individual benefit, which then becomes locked into a lower rate and ceases to grow.

These are some of the more common tactics you can use to enhance your benefits but, when it comes to retirement finance planning, one strategy definitely doesn't fit all situations. Making the most out of Social Security will require that you gain sound knowledge of the program's particulars as well as your own individual situation before making any major decisions.

It's also a good idea to seek some professional guidance. Consulting with a financial advisor can be a worthwhile investment if it helps you make sound fiscal choices that save money in the long run.

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10 Comments

All these suggestions about waiting hinge on the big "if"--as in, what if I don't even live to age 70? It seems every time I see an obituary page I see reports of people who have lived to, let's say, 89 or 95, but in the next column are a couple reports about people who died at perhaps 59 or 66. Yes, you get a larger check if you wait, but the larger amount will have been affected somewhat by inflation, and the cumulative amount you can get in the early years is worth something, too. I'm 60 1/2, and I'm not the least bit ashamed to admit I plan to retire at 62 1/2 and start collecting SS either right then or perhaps when I hit 63. By doing so I can keep more of my own investments growing, and start enjoying what will probably be the best and healthiest (and possibly the only) years of retirement. A couple of investment brokers have heard my plans and found no problem with it.
It is sensible to make hay while the sun shines on the SSA Trust, your health, the economy, and the possibilities of your continued employment. Live in the NOW.
I like your take on this, Sylvie. Since posting this, I've decided to retire in a few weeks just before my 61st birthday and start collecting SS right at 62. I've changed my plans so I can take care of my parent after my sister and I move them close to her home. I will be with my parents in a one-level first-floor apartment. Mother is in a nursing home to the tune of $8K a month because that was the only option in the rural area she is in, and Father is still at home with a kind neighbor spending several hours a day to help him. My sister and I drive 7 and 10 hours, respectively (htat's just one way, and in addition I live 7 hours from my sister), to visit them and try to cover bills, checks, etc. Soon we'll all be able to be near each other. I know it will involve some challenges, but I'm gearing up for it. My parents aren't very wealthy but they're "comfortable" and want us to inherit what they have. (I have to laugh--my father wants to stay in his house until it sells without using an agent so he can "save" the commission for us, but I made a chart showing that in a "worse-case scenario", hanging around the area with Mother still in the nursing home offsets the saving of the real estate commission within one month.) I've saved my money, too, but I can't see the point of working while dumping at least twice what I'm earning just to keep one or both of my parents "incarcerated" in a nursing home. If it gets to where that is really needed, my sister and I will resort to that, but we want them to be with each other and with us, too, as long as possible. I guess I've changed the topic a bit, but I figure it has implications for the original one. In any case, I'll probably have some new insight within a couple months! I'm planning to do some consulting for my current company but not work full-time, as that would defeat the purpose.