The Social Security Handbook has 2,728 separate rules governing its benefits. And it has thousands upon thousands of explanations of those rules in its Program Operating Manual System, called the POMS, which provides guidance on implementing the 2,728 rules. Talk about a user's nightmare!
As a young economist, I did a fair amount of academic research on saving and insurance adequacy. At the time, I thought I had a very good handle on the rules. Then I started a financial planning software company, which makes suggestions about what benefits to take from Social Security and when to take them to get the best overall deal.
At that point, I realized I needed to quadruply check my understanding of Social Security's provisions. To do this, I established contacts with experts at Social Security's Office of the Actuary. I also hired a specialist whose only job is to audit my company's social security, Medicare premium, and federal and state income tax code.
The problem with this strategy is you can only check on things you know about. Over the years, I discovered things I had never heard of. I would then check with the Social Security actuaries who would say, "Oh yes, that's covered in the POMS section GN 03101.073!"
Mind you, a large share of the rules in the Social Security Handbook rules are indecipherable to mortal men and the POMS is often worse. But thanks to patience on the part of the actuaries, we've learned things which almost no current or prospective Social Security recipient knows, but which almost all should know.
The reason is that taking the right Social Security benefits at the right time can make a simply huge difference to a retiree's living standard.
Unfortunately, Social Security has some very nasty "gotcha" provisions, so if you take the wrong benefits at the wrong time, you can end up getting the wrong, as in smaller, benefits forever.
Also, the folks at the local Social Security offices routinely tell people things that aren't correct about what benefits they can and can't receive and when they can receive them. Taking Social Security benefits -- the right ones at the right time -- is one of the biggest financial decisions you'll ever make, so you need to get it right.
Getting it right on your own, however, is almost impossible. One of my engineers and I calculated that for couple 62 years of age, there are over 100 million combinations of months for each of the two spouses to take retirement benefits, spousal benefits, and decided whether or not to file and suspend one's retirement benefits. Each combination needs to be considered to figure out what choices will produce the highest benefits when valued in the present (measured in present value). For some couples who are very different in age, survivor benefits also come into play. In that case, the number of combinations can exceed 11 billion!
Fortunately, www.maximizemysocialsecurity.com can help you find the right answer generally within a matter of seconds. It does exhaustive searches of all combinations of months in which you can take actions, but thanks to modern computing power and careful programming, our Maximize My Social Security program can run through millions upon millions of combinations of decisions incredibly fast.
Whether or not you use our software, it's important to have as full a handle on Social Security's provisions as possible. Listed below are 25 things I've learned over the years you may not fully know.
1. If you are already collecting your retirement benefit and are at or over full retirement age, you can tell Social Security you want to suspend further benefits and then ask them to restart your benefits at a later date, say age 70. Social Security will then apply its Delayed Retirement Credit to your existing benefit once you start collecting again. Hence, this is a means by which certain current Social Security recipients can collect higher benefits, albeit at the cost of giving up their check for a while. But this trade off will, on net, often be very advantageous.
2. If you aren't now collecting and wait until 70 to collect your retirement benefit, it can be as much as 76 percent higher than age 62 benefits, adjusted for inflation, once you start receiving the benefit. For many people, it can be even higher if you continue to earn money after age 62.
3. But, if you are married or divorced, waiting to collect your retirement benefit may be the wrong move. It may be better to take your retirement benefit starting at age 62 and then switch to the spousal benefit you can collect on your current or ex-spouse's account starting at your full retirement age.
4. Now, if you're married, you or your spouse, but not both, can receive spousal benefits after reaching full retirement age while deferring taking your retirement benefits and, thereby, letting them grow. This may require having one spouse file for retirement benefits, but suspend their collection.
5. Be careful! If you take your own retirement benefit early, you will be forced to take your spousal benefit early and at a permanently reduced level IF your spouse is collecting or begins collecting his/her retirement benefits while you are still below your full retirement age.
6. If you are divorced, both you and your ex can collect spousal benefits (on each others work histories) after full retirement age while still postponing taking your own retirement benefits until, say, age 70, when they are as high as can be. This is an advantage for divorcees. But there's also a disadvantage. A divorcee who applies for spousal benefits before full retirement age will automatically be forced to apply for retirement benefits even if her/his ex isn't collecting retirement benefits.
7. If your primary insurance amount (your retirement benefit available if you wait until full retirement) is less than half that of your spouse and you take your own retirement benefit early, but are able to wait until full retirement age to collect your spousal benefit, your total check, for the rest of your life, will be less than one half of your spouse's primary insurance amount. Nonetheless, this may still be the best strategy.
8. There is no advantage to waiting to start collecting spousal benefits after you reach your full retirement age.
9. There is no advantage to waiting to start collecting survivor benefits after you reach your full retirement age.
10. If you started collecting Social Security retirement benefits within the last year and decide it wasn't the right move, you can repay all the benefits received, including spousal and child benefits, and reapply for potentially higher benefits at a future date.
11. If you wait to collect your retirement benefit after you reach your full retirement age, but before you hit age 70, you have to wait until the next January to see your full delayed retirement credit show up in your monthly check.
12. Millions of baby boomers can significantly raise their retirement benefits by continuing to work in their 60's. This may also significantly raise the spousal, child, and mother and father benefits their relatives collect.
13. If you take retirement, spousal, or widow/widower benefits early and lose some or all of them because of Social Security's earnings test, Social Security will actuarially increase your benefits starting at your full retirement age based on the number of months of benefits you forfeited. Consequently, you should not be too concerned about working too much and losing your benefits if you elected to take them early.
14. When it comes to possibly paying federal income taxes on your Social Security benefits, withdrawals from Roth IRAs aren't counted, but withdrawals from 401(k), 403(b), regular IRAs, and other tax-deferred accounts are. So there may be a significant advantage in a) withdrawing from your tax-deferred accounts after you retire, but before you start collecting Social Security, b) using up your tax-deferred accounts before you withdraw from you Roth accounts, and c) converting your tax-deferred accounts to Roth IRA holdings after or even before you retire, but before you start collecting Social Security.
15. Social Security's online benefit calculators either don't handle or don't adequately handle spousal, divorcee, child, mother, father, widow or widower benefits, or file and suspend options.
16. The default assumptions used in Social Security's online retirement benefit calculators is that the economy will experience no economy-wide real wage growth and no inflation going forward. This produces benefit estimates that can, for younger people, be significantly less than what they are most likely to receive.
17. Some widows/widowers may do better taking their survivor benefits starting at 60 and their retirement benefits at or after full retirement. Others may do better taking their retirement benefits starting at 62 and taking their widow/widowers benefits starting at full retirement age.
18. If you're below full retirement age and are collecting a spousal benefit and your spouse is below full retirement age and is collecting a retirement benefit, your spousal benefit can be reduced if your spouse earns beyond the Earnings Test's exempt amount. And it can also be reduced if you earn beyond the Earnings Test's exempt amount.
19. The Windfall Elimination Provision affects how the amount of your retirement or disability benefit is calculated if you receive a pension from work where Social Security taxes were not taken out of your pay, such as a government agency or an employer in another country, and you also worked in other jobs long enough to qualify for a Social Security retirement or disability benefit. A modified formula is used to calculate your benefit amount, resulting in a lower Social Security benefit than you otherwise would receive.
20. Based on the Government Pension Offset provision, if you receive a pension from a federal, state or local government based on work where you did not pay Social Security taxes, your Social Security spouse's or widow's or widower's benefits may be reduced.
21. If you have children, because you started having children late or adopted young children later in life, they can collect child benefits through and including age 17 (or age 19 if they are still in secondary school) if you or your spouse or your ex spouse are collecting retirement benefits.
22. If you have children who are eligible to collect benefits because your spouse or ex spouse is collecting retirement benefits, you can collect mother or father benefits until your child reaches age 16.
23. Your children can receive survivor benefits if your spouse or ex-spouse died and they are under age 18 (or age 19 if they are still in secondary school).
24. You can collect mother or father benefits if you spouse or ex-spouse died and you have children of your spouse or your ex-spouse who are under age 16.
25. There is a maximum family benefit that applies to the total benefits to you, your spouse, and your children that can be received on your earnings record.
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