Social Security can seem simple enough. Get taxed for it throughout your working life, and then collect benefits from the program in retirement. It's far more complicated than that, though, because there are lots of decisions and actions under your control that will have an effect on how much money you ultimately receive from Social Security -- potentially a major effect, netting or losing you tens of thousands of dollars.
For example, even though the age at which you're entitled to start receiving your "full" benefits is likely 67 or close to that, you can start collecting as early as age 62, as late as age 70, or any time in between. The earlier you begin, the smaller the checks. The later, the bigger -- by about 8% per year between age 67 and 70. Waiting for the biggest possible check isn't always the smartest move, though, because you lose out on dozens of months of smaller checks. The Social Security Administration has pointed out that for those who live an average lifespan, there won't be much difference in total benefits received, no matter when you start collecting.
Still, there's a solid chance your lifespan will be significantly longer or shorter than average. And if you're married, you have even more options and strategies to consider. Making smart Social Security decisions can have a major impact on how much money you get out of the program.
More than 8,000!
According to Christopher Jones of Financial Engines, America's largest defined contribution managed account provider, "There are more than 8,000 strategies for a married couple to claim Social Security, making it one of the most complex and confusing, yet critically important, retirement decisions people have to make."
He should know, because the folks at Financial Engines gave more than 1,000 retirees and near-retirees between the ages of 55 and 70 a quiz, to gauge their Social-Security savviness. They learned that despite generally scoring poorly on eight questions about Social Security, fully 77% of respondents who have yet to start collecting benefits were confidence in their ability to make good decisions regarding it. Uh-oh.
That overconfidence can be very dangerous -- just as it is when it leads us to make investing errors.
How do you compare?
Among those not yet receiving Social Security benefits who took the 8-question Financial Engine quiz, 73% received a score of C or lower. Two sample true/false questions were:
- If a working, married person paying Social Security taxes dies, the spouse can get survivor benefits from Social Security even if there are no children.
- If you're divorced, you can collect benefits based on your ex-spouse's earnings as long as you were married for 10 or more years.
How do you think you'd do? You can take the quiz here and you might also check out Financial Engine's interactive Social Security planner, which can show you some strategies that can save you a lot of money. To get an idea of possible savings, here's one scenario. Let's say you're male, never married, 50 years old, earning $60,000 per year, and expecting to have an average lifespan. If so, you can expect to collect roughly $21,900 per year if you start receiving benefits at age 65 and $25,300 if you start at your "normal" retirement age of 67. (Your benefits will be adjusted annually for inflation.) If you delay collecting until age 70, your annual take will be about $31,300 per year.
The Financial Engines planner shows that by retiring at age 65, you can expect lifetime benefits of $475,600 -- or $61,900 more, $537,500 -- if you delay collecting until age 70. It can perform more tricks than that, though -- especially for married folks. Imagine a couple, both 50 years old and with average life expectancies, and earning $60,000 each. If they both begin collecting at age 65, they can expect lifetime total benefits of about $1 million. Another strategy, though, would give them some $160,800 more in lifetime benefits -- if the wife began collecting at 68 and the husband at age 67.
The numbers will vary widely for each of us, depending on our ages and incomes, whether we're part of a married couple or not. As Jones noted, "Social Security provides half to three-quarters of retirement income for most Americans, so the importance of getting the most from this benefit cannot be overstated." Spend a little time learning more about Social Security strategies before taking any action. There are tens of thousands of dollars at stake. It's not unreasonable to consult a (fee-only) financial advisor, either.