Avoiding Costly Social Security Mistakes
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Since the Social Security Act became law in 1935, hundreds of amendments have been added making it difficult to navigate among its choices which commonly cause costly mistakes. Commonly held beliefs, simplistic rules and one-size-fits-all solutions such as “Always file for early benefits” and “You need to stop working to receive benefits” can cost retirees literally hundreds of thousands of dollars.
To make the best decision, one must consider various factors including age, income before retirement, income after retirement and taxes. The decision for women is even more critical as on average women outlive men therefore must make their savings last longer.
Regarding couples, joint longevity must be taken into account BEFORE either one files for benefits or the person with the longer life expectancy (women) will inherit either a wise or foolish decision that will last a lifetime. Given that often a husband’s benefits are higher and a wife’s life expectancy longer, each case needs to be carefully analyzed.
For example, John Doe was born in 1950 and will turn 62 this year (2012). His spouse, Jane Doe, is three years younger. Both are wondering whether he should start drawing his benefits at age 62 or whether he should wait until age 66 (2016) when he can receive $2,384 a month.
75% of Americans file for Social Security before their full retirement age. Sadly, this mistake is statistically most costly when the husband chooses to begin receiving benefits at age 62. In John and Jane’s case, such a mistake would cost the Doe’s a whopping $152,046 in lifetime income.
Assuming normal life expectancies, Jane should file for benefits at age 63 when John will be age 66 as that’s when he’ll be able to pursue an often overlooked Social Security loophole called “File as a Spouse First” or FAASF. How the FAASF loophole works in this example is that John can elect to file only for his spousal benefit and delay filing for his own benefit until age 70 when at such time his benefit will be even greater.
The box circled in yellow represents when Linda is age 63 and James is age 70 which captures the highest lifetime benefit. The boxes circled in red represent the loss in benefits if both choose to take Social Security benefits at ages 62 and 65 respectively. Again, many people file after considering only one or two isolated options.
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