By: Theresa Cagle Fry, SVP, Manager, Retirement and Education Planning
It’s October and that brings to my mind colorful falling leaves, football, pumpkin spice everything and one of my favorite holidays, Halloween. There’s just something fun about watching scary movies, wandering through a corn maze (maybe that’s just a Midwest thing?), or transforming yourself or your kids into a favorite character for trick-or-treating. And let’s not forget the candy!
When it comes to your financial well-being, making a misstep that costs you money or leads to you not being able to retire when you want is the kind of scary that is not fun. That’s why during October, our Private Client Services team reviews Scary Financial Mistakes and how to avoid them.
Let’s start off with five Social Security mistakes that can cost you money. For individuals nearing retirement, deciding when to stop working typically goes hand in hand with how to replace the loss of your paychecks. Social Security is one of the most relied upon income sources in retirement, but maneuvering through its complex rules can be as fear-provoking as a haunted house.
Mistake 1: Failing to Take the Long View for Your Filing Decisions
As you work and pay FICA taxes (also known as Social Security contributions), you earn credits for Social Security benefits. You can earn up to four credits a year and need 40 credits to receive Social Security benefits on your own. The amount of your benefit is based on your top 35 years of earnings, and if you don’t have 35 years of work history, zeros will fill in the missing years. If you are close to 40 credits or you have zeros in your top 35 years, working a few more years and delaying when you file for benefits could make the difference from not being eligible to being able to receive Social Security or increasing the amount you receive by removing those zeros from your top 35 years. Keep in mind, too, that most people fail to take the long view on their own life expectancy and worry they will die young. However, there is a 50% chance that a 65-year-old woman will be alive at age 88 and a 50% chance that a 65-year-old man will be alive at age 85. The Social Security Administration has an online life expectancy calculator Retirement & Survivors Benefits: Life Expectancy Calculator (ssa.gov) that you can use to estimate how long you may need to receive benefits after retirement. If you are married, another tip for making your filing decisions with a more long-term view is to coordinate your filing decision with that of your spouse. It can make a big difference after your spouse dies and the survivor benefits from Social Security begin.
Mistake 2: Failing to Plan for Taxes
Social Security benefits are taxable income for most people. Federal income taxes are based on “provisional income”. Provisional income is the sum of your adjusted gross income (AGI), plus any tax-free interest income, and one-half of your annual Social Security benefit amount. If that amount exceeds $34,000 (single) or $44,000 (married), then up to 85% of your Social Security income will be taxable. Since provisional income is largely based on AGI, taxation of benefits will be impacted if one spouse is working while the other is retired. AGI also includes other sources of income besides working wages, such as interest income, investment dividends and capital gains. Consult with your tax advisor and do some tax planning before you file for Social Security. Some strategies, such has using Roth IRAs and qualified charitable distributions during retirement can help lower AGI.
Mistake 3: Overlooking Benefits After Divorce or Remarriage
Divorce rates, especially among older couples, are increasing. Many believe they are no longer eligible for spousal or survivor benefits after divorce. However, divorce does not on its own make you ineligible to collect Social Security from an ex-spouse. To receive a benefit, your marriage must have lasted for at least 10 years, both you and your ex must be at least age 62, and you must be unmarried when you file for Social Security. Even if your ex remarries, it does not make you ineligible. However, if you remarry, you will lose any spousal benefits you are collecting from your ex-spouse (but you may be able to receive them from your now-current spouse). If you remarry before age 60, you will also lose the ability to receive a survivor benefit from a deceased ex, but by remarrying after age 60, you get to keep those benefits. Keep in mind, too, if you are eligible for a spousal or survivor benefit, there is no advantage to collecting those benefits after your full retirement age (FRA), but there are reductions that apply if you take them early. FRA is age 67 for anyone born in 1960 or after.
Mistake 4: Taking Social Security Too Early
Some people just have FOMO (fear of missing out) and think they need to start Social Security as soon as possible at age 62. But when collecting your own benefit, taking Social Security early can cause you to miss out on delayed retirement credits. Just as collecting early (before FRA) reduces your Social Security, collecting late (after FRA) increases your Social Security, by 8% a year until age 70. For example, if your primary insurance amount (PIA), which is the monthly Social Security benefit amount you can collect at your FRA, is $1,500 a month and your FRA is age 67, beginning Social Security at age 62 will reduce it by 30% to $1,050. On the flip side, if you wait until age 70 to collect, it will be $1,860 or 124% of your PIA. If you live to age 90, your lifetime benefits would be $367,575 if you started age 62 versus $468,720[i] if you waited to collect until age 70. The decision to start Social Security as soon as possible would cost you over $100,000 during your retirement. Now that is frightening!
If you recently began collecting Social Security, you do have a limited opportunity to withdraw your application. If you change your mind during the first 12 months, and pay back all benefits received, you get a fresh start when you later decide to file for Social Security. Withdrawing an application is different than suspending benefits. If you are FRA or older, you can temporarily turn off Social Security and earn delayed retirement credits until age 70, increasing the amount you would later receive. When you voluntarily suspend your benefits after FRA, you do not have to pay back any prior benefits, but keep in mind with either approach, if you withdraw or suspend, you are also turning off any benefits for a spouse if they are collecting based on your work.
Mistake 5: Trying to Figure it Out on Your Own
When it comes to making Social Security decisions, going it alone might be as petrifying as Michael Myers on Halloween night. Let our financial advisors and our tools help you do the math before you retire, so you can have a plan ready that is individualized to your financial needs and goals.
[i] Assumes a 2.5% cost of living adjustment.
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.