Claiming your social security benefits may seem like a straightforward thing. You reach your retirement age, you file and then shortly thereafter you start getting monthly checks, right?
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Well, think again. With more than 8,000 ways a married couple can file for benefits, countless people are leaving thousands of dollars on the table because of avoidable mistakes.
“Over 60% of American households rely on social security for more than 75% of their income so getting it right is really important for a lot of people,” says Kelly O’Donnell, executive vice president at Financial Engines, the investment advisory company. “The challenge is it’s not well understood for good reason. It’s very complicated.”
From claiming too early to thinking the money is tax free, here’s a look at five common snafus people make when it comes to applying for their social security benefit.
Claiming Too Early
Most people will start collecting their social security benefits as soon as they reach their full retirement age. But if they delay claiming their benefits until they reach age 70 they will see a 6% to 8% increase in the amount they get each year, says O’Donnell. “The difference between claiming at age 62 and age 70 is about a 76% cumulative increase,” she says. “Even delaying one, two or three years can really make a difference.”
Letting Fear Drive Your Claiming Strategy
The government shutdown of a couple of years ago is fresh in the minds of many people, including those that are nearing retirement. As a result, many people fear there will be no money left even in a year or two from now and start claiming early. But according to David Richmond, founder of investment firm Richmond Brothers, for people older than 47 there is little to no chance they won’t get their social security benefits. “With any of the published proposals (by politicians) nobody touches social security before age 47,” says Richmond. “Don’t let fear be a driver.”
Missing the Boat On Spousal Benefits
It’s not surprising married couples make mistakes when filing for social security given there are more than 8,000 combinations they can use. Because of the sheer number, Richmond says married couples should either consult a financial advisor well-versed in social security or do their homework on their own before deciding how to claim. The government has a ton of resources online to get information on claiming strategies. You can also call your local social security office to get answers. O’Donnell says one strategy that will protect the survivor in a marriage is to have the lower earner claim early and have the higher earner delay for as long as possible. The lower earner’s monthly checks can be used to supplement their income while the higher earner’s benefits are delayed to get the maximum amount. “Once you reach 60 or 65 in general one spouse outlives the other by eleven years,” she says. “That’s why the survivor benefit is really important.”
Divorcees Don’t Apply For Their Ex-Spouses Benefit
Divorcees may not realize it, but they may be eligible for the benefits of their ex-spouse, which could boost their monthly income. According to O’Donnell you had to be married for at least ten years before the divorce and you can’t be remarried. In order to receive the benefit the amount you would get on your own has to be less than what you can get from your ex. “It’s a little known fact that a lot of people are thrilled to hear,” she says. “They are treated as almost a married couple.”
Thinking Your Social Security Benefit Is Tax Free
Listen to most politicians, particularly around election time, and you are sure to hear them talk about social security as a tax free benefit. Yes you don’t have to pay taxes on it but it does get added to your income so either way Uncle Sam is getting paid. According to Richmond many people will think they are getting $20,000 a year in social security benefits when they are actually getting what’s left over after the $20,000 is taxed. You can choose to pay taxes on your benefits each month, but either way you need to consider taxes as part of income. “The higher adjusted gross income the more you pay,” says Richmond. “Adjusted gross income management is a really important thing.”