6 Social Security Mistakes you NEED to Avoid

Speaker 1 (00:00):

Welcome to the Retirement Power Hour. I'm your host, Joel Allaria, and this is episode nine. Today we're talking about six social security mistakes that you need to avoid if you are nearing the time in which you're gonna start drawing social security. And we also have a listener question from Dave about life expectancy and retirement calculators. So we're gonna get into all of that in just a moment. And first I wanted to just remind all the listeners out there, you can go to retirement power hour podcast.com. Again, retirement power hour podcast.com. We have all of our previous shows, all of our show notes, all of our resources is all right there for you. So you can go and check out all of that anytime. You can also leave your own listener question. Now, I dunno how they did this, but you can, you can click on the website, click a button using your phone, and you can actually leave a voicemail with your question on our website.

Speaker 1 (00:54):

Again, I have no clue how all that works, but it does work. And if you wanna leave your question that way, then go ahead and leave us a message and we will address your question in a future show. Technology is pretty cool. Don't know how it works, but, uh, I'm, I'm waiting for someone to leave that first question on the voicemail. So please go ahead and do that. Uh, if you're listening and if you have some questions, 'cause we're here to answer them, I wanna start by jumping in to that first, to that listener question that I mentioned from Dave about life expectancy. So Dave writes in and says, I am hoping to retire in the next three years, but I would love to retire as soon as possible. I've used different retirement calculators and they seem to show a wide range of outcomes based on the life expectancy that I use.

Speaker 1 (01:40):

I don't think I'll live to age 100 or anything like that, but who knows? I guess it's possible, but using such a high life expectancy could cause me to need to work longer than I want to. I would appreciate your thoughts on this. Well, Dave, first off, thank you for that question. Really appreciate it. And also, I would caution you and everyone listening on using re many of the retirement calculators that are out there today, because many of them are far too basic. They don't include all of the data that you really need to include when you're doing a retirement plan. And some of them don't even include very basic things like inflation changes in your cash flow. And, and that's one of the most common things I've seen when I do a retirement plan. I've hardly done any retirement plans where cash flow is just consistent.

Speaker 1 (02:28):

In other words, someone retires and they have the same sources of income from the time they retire to the time they die. It usually doesn't work like that. Usually I maybe have a pension that either starts now, starts in the future, maybe one spouse retires, the other one's working. Uh, maybe you retire and social security starts in a few years. Then you've got your RMDs that start a few years after that. There's just a lot of variables. But anyway, to answer your question, Dave, um, we don't know. You're right, we don't know how long we're gonna live.

Speaker 2 (02:59):

No one knows that. So if we have absolutely no indication about what your longevity might be, we need to sort of start with the average and understand what the averages are. So I went to social security, uh, ssa.gov, the social security website. They have a calculator out there where you can estimate your life expectancy. I'm gonna put a link to that calculator in the show notes for all of you listeners out there. But I did this for a 65-year-old male, and the average life expectancy is about 84 years for a female, a 65-year-old female, it's about 87 years. So again, if you have absolutely no indication of what your longevity might be or your life expectancy, that's a good place to start. Now, um, if we know a little bit more information, we can kind of tailor it from there. But if I'm doing a retirement plan and I have no other health information, I I I use the li the averages, but then I'm gonna make it a bit more pessimistic.

Speaker 2 (03:59):

In other words, I'm gonna raise the life expectancy just a little bit because that would be more toward the worst case scenario. Now, it's great to live longer if you have a good quality of life, but in, in a, in the financial world and the retirement planning world, living longer as you're seeing when you're using a retirement calculator is actually a bad thing because you have to fund your retirement for more years. So from a financial standpoint, when you live longer, it strains your retirement plan a lot more. And we don't wanna plan for you to live to the average life expectancy of 84 Dave, if you, and then you end up lived living to 86 or 87 or 88 or shoot 90 or 95. And when you, when you have an average of 84, it does mean that some 65-year-old males are living to 88, 90, 95, some even a hundred.

Speaker 2 (04:51):

It, it does happen. And those that live a long time, they are in the minority. But again, it does happen. So that's how I would start. I would, I would understand the average. I would tilt it a little bit toward, you know, you might live longer than the average if we have no other information, if you're generally healthy, we have no reason to believe that you won't, uh, live that long. Speaking of calculators, I did find a life expectancy calculator a few months ago that I thought was really good for estimating life expectancy. I I tried a few different ones and many of them again, were not very good. They didn't ask, you know, hardly any questions. And they just immediately are gonna tell you what your life expectancy is. Kind of similar to social security. All you have to do is enter whether you're male or female and your birthday, and then they're gonna tell you your life expectancy.

Speaker 2 (05:39):

Well, that's, obviously, it's not gonna be very accurate. It's sort of against the, the average. So to get a better idea, we need to collect more data and this calculator does that. It's called living to 100. Again, we're gonna put a link in the show notes so that you can check that out. But it has over 50 questions, um, about nutrition, your diet, your, your daily, uh, routines and your family history, all sorts of different things. And then it does tell you again what, what your life expectancy may be. And it tells you some ways that you could extend that life expectancy if that's something that you wanna do, uh, to, you know, to be healthier. So I would check that out and I think it's a great tool. We, you know, when we're doing retirement plans, we certainly have to make assumptions and we don't wanna get too aggressive on the assumptions that are completely out of our control.

Speaker 2 (06:33):

Life expectancy, more or less, pretty much out of our control. So we don't want to err on the side of putting a number that's too low 'cause you could live longer than that. I hope that helps and I hope that answered your question, Dave, but I will put that link to that life expectancy calculator in the show notes, and I would encourage all listeners to go and check that out. It's kind of cool, kind of humbling, kind of weird. Um, it's a bit morbid, uh, at, at the same time. I, I enjoyed it. But, um, but yeah, that it, it is a little bit weird for a calculator or anybody to tell you how long you're gonna live. So I've, I've shared it with some people and some people have kind of said, Hmm, no, I'm okay. I don't think I'm gonna take that <laugh> that quiz.

Speaker 2 (07:16):

So either way, fair enough. Okay, switching gears, we are going to talk to our, about our, our main topic today, which is social security. And I have six mistakes that I see people making. And these are, these are six mistakes that you need to avoid if you are about to draw Social security. So I wanna jump right into those. And the first one is just taking benefits too early. And this is probably one that you've heard before. Most people know the longer you wait that your social security benefit can go up. But did you know that if your full retirement age is 67, that taking your benefit at 62 results in a 30% reduction in your benefit, a 30% reduction. That means if you are going to receive $3,000 a month at your full retirement age, you're only gonna get $2,100 a month if you take it 62.

Speaker 2 (08:12):

I see people wanting to do this most often because they retire and they may be retired at 62 and they think, well, I have no more income, so I need, I need some income, I need to start taking Social security Now, all the while they, they have their 401k, they have their investment portfolio, but they don't want to touch that. They would rather go in and, and take from Social Security. The concerns are, hey, social security might not be around, they might reduce my benefit in the future. I paid all this money into to the system for all these years. I wanna get it out. I don't wanna touch my money though that I, that I saved in my 401k or my other investments. I totally understand that when you look at the math though, a lot of times it makes more sense to do the opposite, to take from your investments and to let that social security benefit accrue and increase for just a few years.

Speaker 2 (09:07):

You know, we talked about it a couple episodes ago, but social security is the, is the only retirement income source that I'm aware of that is truly linked to inflation. That's never become more apparent to me and I think to a lot of people than in the last couple of years because just in the last couple of years we've seen how much inflation has impacted our daily lives. But those social security recipients have also seen the benefits of that. And so we, I've, I've just seen some estimates coming out for 2023 projected estimates in the 9% range, you know, and we had a big one last year also for 2022, you know, coming into this year. So we can't, we can't automatically think I'm gonna retire and then I'm just gonna start taking Social security just because I'm retired. I, I think we need to look at other options.

Speaker 2 (10:04):

The the best answer is to do a social security analysis on your specific plan so that you know, you're, you're making the the best choice. The second thing we're gonna talk about spousal coordination in just a little bit and why delaying could make a lot of sense, but I'll, I'll save that for a little bit. But the second thing I want to talk about when it comes to drawing early is something called the earnings test. And the earnings test is when you're taking social security benefits and you, and you're still working, um, when you're before your full retirement age. So if you're, you're still under your full retirement age, um, then that earnings test could cause you to, to have $1 benefits withheld for every $2 you earn over $19,560. That's a, that's a 2022 number. So for every $2 you earn over $19,560, they're gonna withhold $1 of benefits.

Speaker 2 (11:07):

That's not tax withholding, that's not, that's not a withholding that you're gonna get a refund on. That's, that's a withholding of your benefit. You just don't get that. Now in the, in the year you hit your full retirement age, it gets a little bit more friendly. They just, they withhold $1 benefit for every $3 earned over $51,960. But once you hit your full retirement age, either way that earnings test goes away. So once you hit your full retirement age, let's just say you're working until your full retirement age, you hit your full retirement age and you, you, you wanna keep working to 68, 69. But if you're at your full retirement age, you can draw social security and get your full benefit and work and make whatever income you want, but before the you hit the full retirement age, that's not the case. You're gonna have some benefits withheld.

Speaker 2 (11:55):

And some people, again, have no reason to draw social security. They just, no, they just wanna start taking Social security. And so they don't, they're not even getting their full benefit, then they're getting a discount on top of that, you know, reduction in the benefits. And so there's, there's just a lot of, uh, reasons to delay. Yes, that is putting a little bit of faith in the social security system. But on that note, you know, in terms of, is social security gonna go bankrupt? I hear that, that comment from some people, well, social security is a pay as you go system. Many of you know that, you know, when you're working, you're paying into the system. So the people that are taking Social Security now, they're getting, you know, some of their benefits are coming from, actually most of their benefits are coming from the, the taxes, the social security taxes that this generation is paying into the system and, and the fact that accounts for about 75, 70 6% of what those, the benefits that they're receiving.

Speaker 2 (12:58):

But the other 24%, it actually comes from a reserve fund Social Security Reserve fund, and that is the fund that is on track to become depleted if no changes are made to the system. So the last we checked it was around 2035. Um, this, this has kind of fluctuated between 2033 to 2034 or 2035 that this fund will will be depleted. And that would mean that if no changes were made that social security, uh, that, that across the board there would be about a 24% cut in social security benefits. Now, as I had, uh, David Blanchet on a few episodes ago, and, uh, he's, uh, an expert in the field of retirement planning, um, and we talked about this and, and his quote was, I think the chances of that happening are absolutely zero because can you imagine all the people that are so reliant on social security getting a 24% cut?

Speaker 2 (13:55):

I can't, I don't think that's gonna happen. I think there's a lot of ways to fix the system that's an EPIs that's a different episode, maybe a future episode, but I wouldn't draw early for fear that you're not gonna get your own the, the full benefit. I, I don't think that argument, at least right now, is a strong enough argument to forego the benefits of delaying. So, mistake number one, taking too early. Mistake number two, not coordinating benefits for married couples. So I, I want to piggyback on that first one. So if, if you're married and you are, you're thinking, let's say you're, you're the breadwinner of the household and you're thinking, gosh, I'm never gonna, I'm not gonna live to 85 90. Um, so I was, I wanna take my benefit now. Well, when the first spouse passes away, the second spouse gets to essentially take over that take over the higher benefit.

Speaker 2 (14:54):

So if you're the breadwinner in the family and you decide you want to take early, you're not only getting a locking in a reduction for you, but you're also locking in a reduction for your spouse. So let's, a lot of times we see a, the male doesn't think he is gonna live very long, you know, and, and they may want to start taking benefits early, but they're not thinking that, well, if I do, let's say, let's say the husband, the the wife's, uh, benefit is not as, as much as the husband's. The husband takes early locks in a lower benefit, he's locking that lower benefit in for him or his wife, whoever lives longer. And I don't think a lot of people realize that. So that's a big thing to think about when it's, when you think about coordinating married couple benefits. Another thing is, let's just say two spouses had similar income, and again, maybe, maybe both are gonna retire at a similar time, similar age.

Speaker 2 (15:50):

I see this a lot, and they just figure, well, we'll just both start taking at the same time. A lot of times it can be beneficial for one person to start taking maybe the benefit that's slightly lower, start taking that benefit, let the larger benefit continue to grow and, and a crew, Ben, and an increase all the way until 70, maybe the first person starts at at 67, maybe the second person is wait waits until 70. Because again, think about what happens when the first spouse passes away. If you both draw at the same time and you get $2,500 a month, you each get that when the first spouse passes away, the surviving spouse is only gonna get 2,500 a month. So you went from a household income of 5,000 to 2,500 a month if you kind of stagger the start dates, which is not the best in every scenario.

Speaker 2 (16:43):

So again, I'm gonna say this a few times, you really need to get a customized social security analysis done. Uh, and we and our firm can help with that. If you want that done, if you wanna look at that, wanna look at your options, we have a really, really nice tool that we can run that for you, uh, at no charge. But it is something you need to look at with your own situation. But imagine you stagger. So the first person's getting 2,500, but the second person delays, and by the time they're 70, they get $3,200 a month. I'm making up numbers, but $3,200 a month, okay? So now when the first spouse passes, the surviving spouse is not gonna get 2,500. He or she's gonna get $3,200, the higher benefit. So it's almost like you're building in some longevity insurance, if you will, for that surviving spouse.

Speaker 2 (17:36):

But there are so many different scenarios that you, that we can run in coordinating those benefits. Okay? So we've gone through two of the six, the third one, not maximizing survivor benefits. So unlike other types of benefits, survivors can begin receiving their survivor benefit as early as age 60. But again, it would be at that reduced rate. However, if you're a survivor, if you're a, if you've been widowed, then you still kind of have the opportunity to switch benefits, to take a survivor benefit for a while and let your benefit grow or, or to take your own benefit and let your survivor benefit grow. So that's a huge point that I, I think people are leaving a lot of money on the table with social security. Uh, but in an example, let's just say your own working benefit is less than your survivor benefit, okay?

Speaker 2 (18:35):

What you, what you could do there is you can start, when can you start taking your own benefit? You can start taking it at 62, we talked about that. Now you do get a reduced benefit, but you can start taking it at 62. But in this case, you could let your survivor benefit continue to grow and you could switch to that at full retirement age. So your survivor benefit continues to earn what are called delayed credits until your full retirement age. On the other hand, let's just say your working benefit was higher than your survivor benefit. Well, in that case, you can, you can start taking a survivor benefit at age 60 and you can allow your own working benefits to earn delayed credits all the way to age 70. And then you can switch to your own increased benefit at that time. So it's also important to note, if you remarry before age 60, then it negates these survivor benefits unless that marriage ends.

Speaker 2 (19:35):

So a lot of, a lot of little nuances here, but I think, I think this survivor benefit, you know, switching benefits back from, you know, from your own to survivor and vice versa. I think a lot of people are unaware of this, and it's something that if this applies to you, you definitely need to reach out and give us a call and we'll help you walk through that. Similarly, uh, the next one point number four, not maximizing divorce benefits. So the same rules that apply for spousal benefits also apply to divorce benefits, uh, provided that the applicant 62 was married for at least 10 years to the ex-spouse and is currently unmarried. So everything I'm gonna talk about right now only applies if you, the applicant, your 62, you were married for at least 10 years to your ex-spouse, and you're currently unmarried. So unlike in the case of a married couple, your ex-spouse does not need to have filed for benefits for you to receive divorce benefits as long as your divorce occurred more than two years prior.

Speaker 2 (20:36):

So you could be, you know, you're married for 10 years, you get to age 62, you have an ex-spouse, um, you could file for, for benefits for a, for a divorced spouse benefits, even if they haven't filed, if you're still married, you couldn't do that. They have to file for you to get a spousal benefit, but if you're divorced, you can do that. Um, and your decision doesn't affect any benefits of your ex-spouse or your ex, um, you know, or your ex-spouse's current spouse. And it doesn't, it doesn't affect any of those benefits. Um, the other thing is, if your ex-spouse passes away, listen to this. If you're, if you have been divorced and at all, um, I don't wanna give any extra motivation here, but if your ex-spouse passes away, then normal survivor benefits could also apply to you, meaning that you could be eligible to start receiving your ex-spouse's full benefit.

Speaker 2 (21:34):

So let's just say I'm, I'm receiving a divorce spousal benefit right now. That means I'm basically getting somewhat in the ballpark of half of what my ex-spouse's primary insurance amount is. Let's just say the, the pri the ex-spouse passes away when that happens, I'm now eligible to get their entire, you know, the same amount of, uh, their primary insurance amount, their full benefit. And I've seen this happen. I I've seen this happen for one of my clients that she went from a very small benefit to and, and, and had about a thousand dollars a month increase. And unfortunately, her expo did pass away. Um, but it did allow for her to get a large monthly increase in her social security benefits. There are even more considerations if you remarry, if your second marriage also lasts at least 10 years, but then it ends in death and death or divorce, you could be eligible for spousal and survivor benefits off both marriages.

Speaker 2 (22:32):

And that's just starting to get too confusing. But again, if you've been divorced or if you have been widowed, then you may have some options you weren't aware of when it comes to Social security, especially if, if you're at least 60 years of age, then you wanna be looking into these things absolutely as soon as possible. Okay, we we're through four, we got two to go. The next one is as simple, the big, the the fifth biggest mistake of Social Security or the fifth mistake we're talking about today. Just relying on Social security, the, the Social Security Office for advice. You know, unfortunately, due to the complexity of the system, we see this time and time again that the Social Security office just gives out bad information and inconsistent information. Uh, I wrote an article and in the article I stated that Lawrence Kotlikoff, a professor of economics at Boston University was quoted in the CNBC article saying that half of the answers, social security is giving people are wrong or misleading.

Speaker 2 (23:32):

And that's a, that's a pretty strong statement. Um, furthermore, an article from money tips.com states that social security employees are not allowed to give you advice on when or how to claim your benefits, but they are supposed to give you the, the advantages and disadvantages of filing strategies. Well, they, they're not running, you know, retirement plans and, and seeing what's in your best interest. They're not there to give you advice, they're just there to process an application. You know, some, some people know more than others, some are easier to work with than others, but they certainly are not doing what an advisor might do. And, and go through different scenarios to try to help you, you know, find the strategy that's gonna give you the best outcome. Um, they're not gonna be able to sit there and tell you how to get the most out of the system.

Speaker 2 (24:17):

Most of the time they just ask you what you want to do. So please do your own research or find an advisor. Again, we are here to run these, this Social security analysis for anyone that's near Social Security age or maybe, you know, you're 62 or older and you haven't started drawing yet, or one of, you know, if your spouse hasn't started drawing yet, please reach out and, uh, we can help you get some good information, some accurate information. And the last mistake that I see people making where it comes to social security, let's just say you've already made your decision, you've already started drawing, but the mistake is that thinking that all of your Social Security decisions are irrevocable, some decisions are, but not all. In fact, if you change your mind about starting your benefits, you can cancel your application up to 12 months after you became entitled to your retirement benefits.

Speaker 2 (25:12):

And this process is called a withdrawal. However, it's not just as easy as stopping your benefits. There's a lot that goes into it. Um, you have to repay all the benefits you've received, um, including your benefit withholdings for Medicare premium tax withholding, et cetera. If anyone is receiving benefits based on your application, they also have to consent in writing to your withdrawal. So there's, there's different things that, that are gonna go into this, but, um, that, that's just one option. However, there's another option that's something that kind of got tied in and confused in years past with that restricted application. And that's called file and suspend. So let's just say that you've filed and you kind of re realize, yeah, I actually don't really need my benefit. Well, you can file and then suspend your benefit and it, and it does exactly what it sounds like it does.

Speaker 2 (26:08):

Um, this is only between full retirement age and age 70. But you can suspend your benefit for the purpose of accruing delayed credits until a later age, until you know, the max age of 70. But, but again, let's just say you started at 64 and, you know, you took benefits for a few years. You thought to yourself, you know what? Gosh, I feel like I messed up. I I don't need any of this money right now. I should have waited. Well, you can suspend your benefit and earn delayed credits. So a lot of people I don't think are aware of that either.

Speaker 3 (26:42):

Okay, that is it, that is the list. That's the, those are the six mistakes, social security mistakes that we want to help you avoid today. I hope it was helpful. I hope that, uh, you don't do any of these things that we talked about and I appreciate those that are listening and tuning in. As a reminder, go to retirement power hour podcast.com for all of our previous episodes. You can listen about things like medicare, retirement planning, investing and all that. And we will be back soon. Don't forget to also submit your listener questions as well when you're on the website. Well, with that, again, I hope this was helpful. Thanks for listening to today's episode, and this is The Retirement Power Hour where we help listeners invest wiser and retire better. Take care.