January 23, 2013 — There is no polite way to say this, so we will just be blunt – America’s baby boomers have a frighteningly poor command of the facts on when to start claiming Social Security. We not only aren’t acquainted with the facts, but we also have some wide-ranging misconceptions. That’s the conclusion of most experts we talk with, as well as a steady beat of newspaper and web articles. The latest came in today from WSJMarketWatch, “Most Fail to Maximize Social Security Benefits“.
Your editor regularly experiences this lack of knowledge on a first hand basis – even among college educated, highly successful, and otherwise financially savvy folks. To help overcome the knowledge gap, this article will cover the 7 major myths that seem to be prevalent among American boomers.
7 Major Myths That Could Cost You Money
1. Start taking Social Security as soon as you can – Age 62
Far too many people haven’t thought about when to take Social Security, so they default to taking it as soon as they can. Unfortunately, unless you have an immediate need for the money and no other resources, or you have reason to believe you will die before age 78, that is a poor financial decision. Take the example of one recipient: at age 62 their benefit is $1500/month. If they wait until their Full Retirement Age (FRA) of 66 to claim, that goes to $2000. And if they wait until age 70, the benefit climbs to $2,640. That’s an 8% increase per year from age 66 to 70 – a pretty good investment these days! And if you are still working past 62, your earnings could help push up your benefit as well.
2. Take it soon because SS will disappear
Social Security has a surplus that is expected to last until 2033 or so. But even then it won’t run out of money, because the younger generation is continually paying into the system. While potential benefits could be cut if Congress doesn’t come up with a plan to fix the system, that will affect everyone in the program at that time. And frankly, we don’t know any politicians willing to tell their senior constituents that they voted to cut Social Security benefits.
3. You can take SS early and then pay it back
Although this used to be true, this persistent myth is no longer the case. You can claim now and change your mind within 1 year, but that is it. After that your decision stands, and it could cost you a lot of money for the rest of your life. See Social Security Q & A.
4. If I wait to collect I’ll die before I ever catch up
It is true that if you are single and die before the crossover age of 78 (the age at which late collectors who delay catch up with early ones) you would have been better off claiming early. However, if your spouse survives you and you were the primary breadwinner, that wouldn’t have been the best financial decision. That’s because at your death your surviving spouse goes from getting 50% of your benefit to 100%. An early collection strategy in that case means your spouse gets a significantly reduced benefit for the rest of his or her life.
5. It’s better to live off Social Security and leave my other investments intact as long as possible
If you have other money you can live from, you will be much better off using that money instead of collecting early. That strategy will help you significantly increase your monthly Social Security benefit. When it comes to using tax deferred money in IRAs/401ks, the question gets a little more complicated, because you will pay taxes on the money as it comes out. This is an area where you should get financial advice on your individual situation from an expert.
6. It doesn’t make any difference how my wife and I claim Social Security
The spousal strategy is very important and somewhat complex. The decision is highly personal depending on your relative ages and life expectancies, who made the most money, and what your current financial needs are. Making a smart decision here could add thousands of dollars to your income vs. a poor decision. See our related article, “Claiming Strategies for Spouses“.
7. I would rather have and spend the money now rather than when I am old
That argument, which we hear quite frequently, seems a bit glib and shortsighted. You might live a long time past the breakeven point for early vs. later claiming, and the amount of money you give up by claiming early could be substantial. And the factor you are ignoring is your increased costs for medical and other care as you age. Chances are you will have a greater need for money in older age.
Far too many folks go it alone when it comes to making important Social Security decisions. Or worse, they rely on casual conversations with friends who share common misconceptions. This is an important benefit and decision – research it carefully and talk with a trusted financial advisor (and don’t be afraid to challenge them – many advisors aren’t as up to speed as they should be)! The Social Security website has a wealth of practical and helpful advice for you.
Note: Be sure to take our new “What is Your Social Security IQ Quiz“. It will give you a score and detailed explanations to make you a Social Security expert (our best advice, read this article first!).
Comments? We are sure that many of our members will have comments and experiences, which we welcome. Please share your thoughts below.