We put money into Social Security with every paycheck. Individuals pay 4.2 percent of their first $110,100 in pay while employers contribute an additional 6.2 percent. Next year, our payroll tax holiday is scheduled to expire and we would be back to paying 6.2 percent. So by the time you retire you and your employers have paid hundreds of thousands into Social Security.
With so much money at stake, how do you plan the best strategy for your situation? Most of us make decisions after talking with friends and spending a little time in the Social Security office or on its web site. Before you rush headlong into making an irrevocable choice, consider these popular Social Security myths:
All options are equivalent. Many retiring baby boomers have come into my office with the idea that all retirement options are equal, whether you take Social Security at age 62 or wait until age 70. It’s true that if you take it at age 62, your benefit is reduced by 25 percent from the amount you would receive at age 66 if you were born between 1943 and 1954. If you wait until age 70, you would receive at least 76 percent more per month than if you started eight years earlier.
There is a big difference between collecting $1,600 a month at age 62 and $2,816 a month at age 70. At first glance this may seem to be roughly the same benefit. After all, if you start at age 70 you’ll collect it for eight years less on average. But this view completely ignores the intricacies such as the spousal benefit, dependent benefits for those who had children late in life, taxation and reduction of benefits while working, and advanced strategies such as filing and suspending your benefit.
It only helps retirees. Of course it’s best known as a retirement income plan, but did you know that Social Security can provide income if you’re disabled and not able to work? Social Security gives us an invaluable safety net here, although qualifying for benefits can be challenging. Also Social Security includes life insurance for those with younger dependents. The death benefit itself is meager, but if you have children under 18 Social Security would provide monthly survivor benefits to them and your spouse for many years.
It’s simple and rules of thumb are enough. Hardly. Let’s take the “file and suspend” option discussed above. Imagine a married couple both aged 62. He has a bigger Social Security benefit accrued because of higher lifetime income. When he reaches full retirement at age 66, he files for retirement benefits. She then can collect a spousal benefit equivalent to half of his benefit. Then he suspends his benefit although she continues to take the spousal benefit. He waits until age 70 to file for the greater payout – a full 32 percent higher than what he would have received at age 66. Upon his death, his wife then qualifies for his full benefit including the credits accrued from his waiting until age 70 to take Social Security.
If you had children later in life, Social Security can offer payments to you and your children if they’re under 18. For older parents, it could make sense to take retirement benefits as soon as possible.
You can see there’s nothing simple about Social Security. Appreciate the life insurance and disability benefits while working, and before taking retirement payments get some expert advice before making a decision you can’t change.