Social Security is a critical piece of your retirement income puzzle, but the program can also be complicated. In particular, it's easy to make mistakes about Social Security, and some of those missteps can be costly. Below, we'll look more closely at three potentially huge Social Security mistakes and let you know how you can avoid them.
Mistake 1: Thinking that delayed retirement credits apply to spousal benefits.
There's been a lot written about the advantages of not taking your Social Security benefits immediately when you become eligible. For those turning 62 this year, full retirement age is 66, and you can boost your monthly retirement benefits by a third if you wait for four years before claiming them. For those who receive spousal benefits rather than benefits based on your own work record, the boost from waiting to claim is even larger, increasing your monthly check by more than 42% when you compare claiming at 66 with claiming at 62.
For retirement benefits, even further gains are available. If you wait until after full retirement age, you get an additional 8% in delayed retirement credits for every year you wait. That can add up to 32% to your monthly retirement benefit above and beyond what you get at full retirement age.
However, delayed retirement credits are not available for spousal benefits. If you're due to collect a spousal benefit, it doesn't make any sense to wait beyond full retirement age. Doing so merely costs you in lost checks that you otherwise would have received.
Mistake 2: Mistiming a divorce.
Couples who are getting divorced don't always have a lot of choice in the exact timing of when things become official. However, for some couples, there's an opportunity to make a divorce-related move that will give one spouse a substantial monetary reward without costing the other spouse anything.
Social Security rules say that an ex-spouse can claim benefits on the other ex-spouse's work record as long as the marriage lasted at least 10 years. Miss that 10th anniversary by even a month, and it could leave an ex-spouse high and dry. Hold out until you hit the 10-year mark, and an ex-spouse is entitled to spousal benefits during the other ex-spouse's lifetime, as well as survivor benefits after the other ex-spouse's death. Obviously, that's not something most couples will be willing to hang on for years longer to claim, but if you only have a few weeks to endure, the financial gain might be worth it.
Mistake 3: Relying on using out-of-date strategies.
Some major changes to Social Security have happened over the past year or so, and it's important to adjust your Social Security planning to avoid making the mistake of thinking that some once-valuable strategies are still available. In particular, the file-and-suspend and filing-as-a-spouse-first strategies have both been strictly limited and might not be available at all to you.
File-and-suspend allowed a worker to file for retirement benefits and then immediately suspend them, allowing family members to claim spousal or family benefits on the worker's earnings record. However, rule changes eliminated this provision for anyone who didn't file and suspend by the end of April. Going forward, the provision won't be available to anyone.
Meanwhile, the file-as-a-spouse-first strategy allowed spouses who had reached full retirement age to file a restricted application only to receive spousal benefits based on the other spouse's work history, letting their own retirement benefit earn delayed retirement credits and grow. For those who turned 62 by the end of 2015, this strategy is still available to you. However, those who are younger can no longer look forward to the file-as-a-spouse-first strategy.
Social Security is complicated, and there are some big mistakes you can make if you're not careful. By being aware of these provisions of Social Security, you can make sure that your retirement will be as financially secure as possible.