You don’t have to become a Social Security expert. But you do need to know enough about it to make sure you avoid some of the more common mistakes that would-be beneficiaries and beneficiaries tend to make. What are some of the more common mistakes?
Married beneficiaries, in many cases, assume that their household Social Security income will just continue at the same amount when either of them dies, says David Freitag, a financial planning consultant with MassMutual.
“With 100% probability, this is not the case,” he says. “The day one of them dies; one of the checks will stop. And this will always cause the household income to fall and, in many cases, the fall can be a financial catastrophe.”
What might you do to plan for this? Learn what the survivors benefit will be depending on who dies first. Typically, the surviving spouse will receive the equivalent of the larger of two benefit checks, says Freitag.
Consider this basic and simplified example: Let’s say the husband was the primary wage earner, claimed Social Security at his full retirement age, and received $1,000 per month. His wife was collecting a spousal benefit in the amount of $500 because she had no earnings on her own record. Should the husband die first, the spouse would then collect $1,000 per month, which would represent a one-third drop in household income. Should the wife die first, the surviving spouse would continue to receive $1,000 per month, but that’s still a one-third drop in household income.
Of note, experts often suggest that the primary wage earner wait to age 70 to claim Social Security. Doing so will ensure that the surviving spouse gets the largest possible widow/widower’s benefit because of something called delayed retirement credits or DRCs. Would-be Social Security beneficiaries can increase their monthly benefit by up to 8% per year by waiting to apply for benefits until age 70.
“For workers with longevity in their family and in good health, waiting to collect benefits can be a powerful way to increase the total lifetime payout,” says Freitag. “The worker receives the delayed retirement credits and the survivor — if their benefit is smaller — receives some or all of the delayed retirement credits as well.”
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Consider life expectancy of second to die
Married couples, besides gaining an understanding of how survivors benefits work, should also consider how best to maximize their expected joint lifetime benefits.
And to do that, Bill Reichenstein, head of research at Social Security Solutions, a firm that sells software to help individuals decide when to begin Social Security benefits, says the higher-earning spouse should, in general, base the age he or she begins his or her retirement benefits on the age he or she would be, or would have been, when the second spouse is expected to die.
Reichenstein gave this example: Suppose the higher-earning husband has a relatively short life expectancy of 80, while his three-year-younger wife has a life expectancy of 87. Based on these life expectancies, benefits based on his earnings record will last until he would have been 90, if still alive.
Therefore, he should delay his retirement benefits until 70, says Reichenstein. In contrast, he says the lower-earning spouse — the wife in this example — might start benefits based on her earnings record early since these benefits will cease at the death of the first spouse. In this example, since her benefits are expected to cease when she is 77, she should start her benefits as soon as possible.
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Are you subject to WEP and/or GPO?
It’s not so much a mistake when it comes to the windfall elimination provision (WEP) and the government pension offset as a lack of knowledge, says Jim Blankenship, a certified financial planner with Blankenship Financial Planning and author of A Social Security Owner’s Manual. “There are not many actual mistakes to be made here, just a misunderstanding of what to expect,” he says.
The WEP can affect how the Social Security Administration calculates your retirement or disability benefit. If, for instance, you work for an employer that doesn’t withhold Social Security taxes from your salary, such as a government agency or an employer in another country, any retirement or disability pension you get from that work can reduce your Social Security benefits.
The GPO is a law that affects spouses and widows or widowers. If you receive a retirement or disability pension from a federal, state or local government based on your own work for which you didn’t pay Social Security taxes, the Social Security Administration may reduce your Social Security spouses or widows or widowers benefits.
Robert Powell is the editor of TheStreet’s Retirement Daily and contributes regularly to USA TODAY. Got questions about money? Email Bob at firstname.lastname@example.org.