5 Ways to Screw Yourself Out of Social Security Dollars

Byz·an·tine

ˈbizənˌtēn,ˈbizənˌtīn/

adjective - (of a system or situation) excessively complicated, typically involving a great deal of administrative detail.

If ever there was word to describe the U.S. Social Security system, that's it. Retirement benefits, disability benefits, survivor benefits, spousal benefits . . . the pitfalls are endless. Here are some of the more common ones for you to recognize and avoid:

1. STARTING YOUR BENEFITS TOO EARLY

Every year that you can avoid taking your retirement benefit up until age 70 it grows by 8%. That means a $1,000/month benefit at age 62 grows to over $1,850 at age 70. As tempting as it is to 'get while the gettin' is good', if you can delay the start of your benefits, it can really pay off in the long run. 

Of course, there's a down side: if you pass away before or shortly after you start drawing benefits, you miss out benefits you otherwise could have been collecting which brings us to:

2. STARTING YOUR BENEFITS TOO LATE

If you are in poor health, it may make sense to begin taking benefits earlier. The break-even point (the age past which you need to live to make delaying benefits worthwhile) varies with individual circumstances, but according to an article by Doug Lemons, Retired Deputy Assistant Regional Commissioner of the Social Security Administration, in the Journal of Financial Planning, when deciding between benefits at 62 and your full retirement age (66 for many), the break-even age ranges between 81 and 86 depending on your tax situation and asset returns in excess of inflation.

If you're choosing between full retirement age and delaying until 70, the break-even points range from 84 to 87. Your decision should be made based on your specific health and financial circumstances.

3. TAKING EARLY BENEFITS WHILE YOU'RE WORKING

If you take benefits before your full retirement age (FRA) and continue to work, the Social Security Administration (SSA) will withhold $1 for every $2 you earn above $15,720 (in 2015). Good news when you hit the year you turn your FRA - they only withhold $1 for every $3 above a higher $41,880 (again - 2015 number).

Even more good news: any benefits withheld while you continue to work are not "lost". Once you reach FRA, your monthly benefit will be increased permanently to account for the months in which benefits were withheld. This mechanism for this is complicated (surprise!), but essentially for every month's worth of benefits withheld, you will have a month added to your starting age in calculating your benefit.

4. MAKING SO MUCH MONEY YOUR SOCIAL SECURITY BENEFITS GET TAXED

If you make more than a minimal amount of "combined income" *, your Social Security benefits are subject to income tax. The threshold depends on your filing status ** and the amount of your benefit subject to tax is 50%. A higher threshold subjects 85% of the marginal benefits to tax.

Now please note, this is not a 50% tax rate, rather 50% of your benefits above the threshold (see below) would be taxed at your marginal rate. For example, if you are single, have $25,000 in income before Social Security benefits,earn $9,000 in Social Security benefits, and are in the 15% marginal tax bracket, your Social Security benefits would be taxed at an effective rate of 7.5% (50% * 15%).

Obviously, in making the choice between taking benefits now and letting them grow at 8% a year, it's important to integrate your expectations of non-Social Security earnings to calculate how much you keep after tax. In other words, if Number 3 doesn't convince you to wait until you're done working before drawing Social Security, consider the taxes too.

* "Combined Income" equals your:

Adjusted Gross Income (that number at the bottom of your Form 1040 -plus-

Nontaxable Interest (Note: receiving Social Security does not suddenly make this interest taxable, but it does lower the effective threshold for making a portion of your Social Security benefits taxable) -plus-

1/2 of your Social Security benefits

** For Individual filers (2015 numbers) the 50% threshold is $25,000 and the 85% threshold is $34,000

For Joint filers the thresholds are $32,000 and $44,000 respectively.

5. FAILING TO COORDINATE BENEFITS BETWEEN SPOUSES (AND EX-SPOUSES)

The simple calculation is that as a spouse, you are eligible for 1/2 of your spouse's benefit (and vice versa). Of course no Social Security calculation is simple. The actual benefits depend on the age at which you start your spousal benefits and how your spouse has filed for their benefits (and at what age). Once your have reached your FRA, there are a couple of strategies that can maximize your benefits:

RESTRICTED APPLICATION

If your spouse is currently receiving benefits, once you reach FRA you can file for "restricted application" and collect a spousal benefit while letting your own benefit continue to grow at 8% until age 70.

FILE AND SUSPEND

Conversely, when you hit FRA you can file and suspend your benefits, allowing your spouse to collect their spousal benefits, again allowing yours to grow to age 70 while they are 'suspended'.

CAUTIONS

1) To claim spousal benefits, the other spouse must have claimed their benefits (though they may have suspended them).

2) If you file for either benefit before your FRA, you are deemed to have filed both and the clock stops on the 8% growth.

EX-SPOUSES

If you are over 62, not currently married, and were married for at least ten years, you may be eligible for spousal benefits under your ex's earnings. 'May be' because your ex will have had to claim their benefit or be eligible to and the two of you been divorced for over two years. The benefit works essentially like the spousal benefit above with the same caution about filing before your FRA. 

Additionally, if your ex has passed away, you may be eligible for survivor benefits if in addition to having been married for 10 years, you are over 60 and unmarried (or remarried after 60).

As you can see, collecting Social Security benefits is tricky work. It may pay to seek the advice of a financial professional before you file for benefits. 

If you are a Missouri resident, Compton Advisors, LLC will be happy to talk to you about your options. Visit our website at www.comptonadvisors.com, drop me a note at john@comptonadvisors.com, or call 314-772-9857.