Each day, thousands of Americans apply for the first time for
Social Security benefits. And each day many applicants have no idea what
they're getting into. Here’s a look at
some of the biggest issues—involving both the agency and the benefits
program—that could shape your retirement for better or worse.
The Social Security
Administration isn't your financial adviser.
The primary job of the Social Security Administration is
delivering a service, paying 59 million beneficiaries, and not financial
planning. It is your responsibility to learn about the basics: how benefits
work, claiming strategies, possible pitfalls. As it shouldn’t, since it is not
the agency’s job to know about your household budget, health, savings, life
insurance, or other variables that should be factored into your decision about
filing for benefits.
The Social Security
Administration is stretched increasingly thin at the worst possible time.
The agency is overextended. In the past three years, it has
lost 11,000 employees, or about 12% of its workforce. The budget cuts have
resulted in the consolidation of 44 field offices, the closing of 503 contact
stations (mobile service facilities) and a delay in plans to open eight hearing
offices and one call center. This has led to increased wait times on the 800
number as well as delays in getting an in-person appointment.
More services outside
Social Security are offering more help.
A growing number of tools and services—some free, others for
a cost—are available to help people navigate these waters. In recent years, many
free sophisticated online calculators help users determine how and when to
claim benefits.
The earnings test
deters people from working in retirement—and shouldn't.
Social Security's earnings test, in which benefits are
reduced if a person is collecting benefits and income at the same time, generates
numerous questions and much confusion. If you are under
your full retirement age when you first receive Social Security benefits and if
you have earned income, $1 in benefits will be deducted for each $2 you earn
above an annual limit. In 2014, that limit is $15,480. In the year you reach
your full retirement age, the penalty shrinks; after you reach full retirement
age, the deductions end completely. The apparent penalties aren't what they seem and the money
lost to the earnings test isn't really lost. Once you reach full retirement
age, Social Security recalculates—and increases—your future benefits to account
for any dollars withheld.
Spouses, at a minimum,
should be aware of three claiming strategies.
Maximize survivor
benefits: The
longer you wait to claim, the larger the survivor benefits.
Claim and suspend: Once you reach full retirement
age, you can claim your benefit and then suspend it. This allows for two
things: Your spouse, if he or she is 62 or older, can begin collecting spousal
benefits from Social Security. Second, your own benefit, when you eventually
claim it, will have increased in size.
Claim a spousal
benefit, then later claim your own benefit: At full retirement age—if you
are eligible for a spousal benefit and your own retirement benefit—you have the
option of claiming just the spousal benefit. At a future point in time, you can
then jump to your own benefit, which will have increased in size.
"Deemed
filing" can box you in.
Claim benefits before full retirement age, and your options
are limited; claim benefits after full retirement age, and you have more
flexibility—and bigger payouts. It's a frequent question: A husband who is
already collecting Social Security (or weighing the claim-and-suspend strategy)
asks if his wife can take just a spousal benefit at age 62—and then switch to a
(presumably larger) benefit based on her earnings record in the future. The
answer: Nope.
If the wife, in this case, applies for benefits before her
full retirement age, she is "deemed"—in the eyes of the Social
Security Administration—to have filed for both benefits: the benefit based on
her work record and a spousal benefit.
She will receive the higher of the two figures, but she will
be locked into that reduced benefit going forward. (Reduced because she is
claiming benefits before full retirement age.)
Divorced spouses and
survivors don't know what they don't know.
Always err on the side of telling Social Security about your
family circumstances and/or a change in those circumstances. Telling the agency
about ex-spouses, deceased spouses, or children can have an impact and make you
eligible for additional benefits.
Delaying Social
Security doesn't just result in a bigger benefit; it also can make good tax
sense.
If you delay claiming Social Security and, as a result, end
up with larger benefits, future withdrawals from savings will likely be
smaller—a recipe for lower levels of taxable income. This is because as much as
85% of a married couple's benefits are subject to tax when their income exceeds
$44,000 ($34,000 for individuals); as much as 50% of benefits are taxable at
lower income levels.
Click here for
the full article on The Wall Street Journal.