By Paul S. McNulty, CFP®
As someone with a sizable nest egg and considerable assets, you might think that your Social Security benefits aren’t a critical piece of your retirement plan. But that’s just not true. Today, Social Security benefits can make up an average of 40% of a typical retiree’s income. (1) Because your Social Security benefit is calculated using your earned income throughout your career, the income can be significant, even for wealthy retirees. If you don’t have a complete picture of the system and how your benefits work, you may make some of these common Social Security mistakes, which can be avoided with a bit of planning.
1. Guessing Your Benefits
If you don’t know how much you are estimated to receive, you can’t properly incorporate this benefit into your overall plan. The first step in the decision-making process is gathering the necessary information. If you are paying into the system, the Social Security Administration will send you a statement every five years, and every year once you turn 60. This is a paper statement mailed three months prior to your birthday. If you do not have a recent statement, you can view yours online by setting up an account on the Social Security website, or you can request a paper copy from the Social Security Administration.
Your Social Security statement includes estimates for your monthly benefit if taken at age 62, your full retirement age, or the maximum benefit at age 70, and also includes your earnings history. Once you know what to expect from your Social Security benefits, you can also avoid the next mistake, not creating a personalized claiming strategy.
2. Relying On A One-Size-Fits-All Claiming Strategy
The Social Security Administration provides you with 567 ways to claim Social Security benefits (2) and the Social Security Handbook has 2,728 separate rules governing your benefits. (3) As you can see, there is no one-size-fits-all claiming strategy for Social Security. There are several factors that play a role in the amount of benefits you receive and the ideal date for you to start claiming those benefits, including your health status, life expectancy, need for income, whether or not you plan to continue working, and how concerned you are about running out of money.
Social Security benefits can be claimed anytime between ages 62 and 70. The timing of when you (and your spouse) decide to collect these benefits will impact the amount of payout you each receive. For example, if you start claiming benefits at age 62, your benefit is about 26% lower than if you waited for full retirement age (FRA), and the benefit is over 40% less than if you wait until you are age 70 to claim. It’s also important to consider how long you’ve worked and your lifetime average monthly earnings, which are used to calculate your benefit. In some cases, working a few extra years can have a big impact on your monthly Social Security benefit.
Picking the Social Security strategy that is right for you is complicated, so it’s important to work with a financial professional that understands the options available and can help you determine the best strategy for you given your unique circumstances.
3. Not Incorporating Social Security Into Your Financial Plan
While having a strategy for when to begin Social Security benefits is important, it is also critical to analyze your Social Security benefits in conjunction with all of your retirement assets. Incorporating your benefits into an overall retirement income plan may make a world of difference in the amount of income available to you in retirement.
While the average Social Security retirement benefit payment is about $1,460 per month, (4) the maximum benefit at full retirement age for 2019 is $2,757 per month. (5) For those who wait until age 70 to start receiving payments, the maximum monthly payment for 2019 is $3,770. No matter how much you have saved in other retirement assets, your Social Security benefit is money you don’t want to leave on the table.
Also, because Social Security payments increase with cost-of-living adjustments, the monthly benefit will continue to grow throughout your retirement. Even if you don’t need Social Security payments to live on during retirement, the benefits can be invested or gifted to your heirs. It’s important to plan ahead to maximize your total lifetime benefit and plan to use the asset as part of your overall financial plan.
4. Neglecting To Account For Additional Income
You might think your benefit amount is set, but if you begin receiving benefits before FRA, your earnings will affect your benefits. Any income, such as wages or self-employment earnings, you earn before the year in which you reach FRA reduces your Social Security benefit once it surpasses a specific limit. For 2019, the limit is $17,640. Once your earnings exceed that, your Social Security benefit will be reduced by $1 for every $2 you earn. For example, if you earn $20,640 in 2019 you have earned $3,000 more than the limit. Because of that, you will receive $1,500 less from Social Security.
The income restrictions change the year you reach FRA. That year there is a higher limit, which is $46,920 for 2019. Your Social Security benefit will be reduced by $1 for every $3 you earn once you pass that limit. As soon as you have your birthday and reach FRA, though, there are no more limits. At FRA, you can earn as much as you want and it has no effect on your Social Security retirement benefits. If you don’t keep an eye on your income and exceed the limit, you could unknowingly be throwing away your hard-earned benefit money.
There are situations where continuing to work into retirement may be beneficial even if your current benefits are reduced. If your income in your later years is within the top 35 years of your earnings, you will increase your AIME, which is the average used to calculate your benefit. By continuing to pay into Social Security as a worker, you can increase your retirement benefit even after you have begun collecting it.
Avoid A Social Security Headache
Your Social Security benefit is a unique asset because the payments are guaranteed by the government to last throughout your lifetime. The benefits also take inflation into account. Unlike some other assets, the value of your Social Security benefit increases with higher than expected inflation. Because your Social Security asset behaves differently than other investments within your portfolio, the total benefit and claiming strategy should be considered when investing your other retirement resources.
If you have questions about how to avoid common Social Security mistakes and create a plan to tie your benefits into your overall financial plan, contact us at Boston Metro Advisor for a complimentary consultation by calling (781) 995-0253 or email me directly at [email protected] today!
Paul McNulty is the founder of Boston Metro Advisor with over 20 years of experience helping people navigate the ups and downs of the economy toward the financial future they envision. His education consists of a Bachelor of Science in business administration from the University of Rhode Island and the CERTIFIED FINANCIAL PLANNER™ (CFP®) professional designation.
Paul’s experience and education have made him a multi-faceted professional capable of assisting people with virtually all their financial needs. His services include every facet of retirement planning, from 401(k) rollover services and income planning to wealth management and estate planning. Paul has been active in his community over the years as a youth sports coach. When he’s not spending time with his wife, Cindy, and their two children, who are both recent college graduates, Paul enjoys reading, playing golf, and fishing. Learn more about Paul by connecting with him on LinkedIn.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
(2) Center for Retirement Research. Social Security: There is a better way. Boston College, September 2012.