Social Security Optimization
For most households, there’s no retirement resource more important than Social Security. And making smart decisions about when to file for benefits can make a difference of thousands of dollars during your lifetime–especially for married couples, who can take advantage of the program’s valuable spousal and survivor benefits.
But many Americans don’t take the time to understand Social Security’s benefit structure so that they can optimize their benefits, and many simply don’t understand the program. A 2010 survey by the Pension Research Council at the Wharton School of the University of Pennsylvania found only 25% of respondents could correctly answer a question about how Social Security benefits are calculated. Forty-three percent didn’t understand that Social Security benefits can be taxed in certain situations, and the same proportion did not know that benefits are adjusted for inflation.
Most important, most people don’t seem to understand the relationship between the full retirement age, claiming age, and the level of benefit they can receive. For example, 56% of men and 63% of women filed for benefits sometime before the full retirement age of 66 in 2011 (the most recently available data). This is despite the fact that filing at the first age of eligibility (62) gets you just 75% of your full benefit. Waiting until the full retirement age (currently 66) gets you 100%, and waiting until age 70 gets you 132% of your benefit.
Delayed filing can be especially beneficial for women, who tend to outlive men and run a higher risk of falling into poverty at advanced ages. That makes it all the more important for couples to leverage the benefits of the higher earner to benefit the surviving spouse, with strategies such as file-and-suspend.
It’s hard to imagine a more important financial decision to get right. One third of today’s seniors rely on Social Security for almost all (90% or more) of their income, according to the National Academy of Social Insurance; two thirds count on it for more than half of their income. And the numbers are higher still for single, retired women (widowed, divorced, or never married).
The Social Security Administration can help–to a point. If you visit one of Social Security’s field offices, staffers will be happy to help you run numbers showing what you’ll be paid over time, depending on when you file. But they don’t make recommendations. Their policy is to not advise people on what’s best for them They can tell you ‘if you take Plan A, here is what you’ll get paid over 10 or 20 years, and if you take Plan B, you’ll get this.’ What they won’t do is say, ‘you should take Plan A.SSA offices also can’t always be relied on for information on more complex strategies, such as file-and-suspend.
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