One of the most important retirement decisions you will make is when to sign up for Social Security. There are many factors that should be considered before you select the best age to sign up. The Government Accountability Office recently observed 30 in-person claims at seven Social Security Administration field offices and found that many Social Security beneficiaries were not provided with key information they need to make well-informed decisions. “Claims specialists generally provided accurate information about program rules and benefits and answered claimants’ questions,” GAO found. “In some instances, however, they presented or omitted key information in a way that could confuse or even bias people’s claiming decisions.” Here’s a look at some of the important information that was left out or difficult to understand that could have a significant impact on how much you receive from Social Security.
[See: 10 Ways to Increase Your Social Security Payments.]
The advantages of delaying claiming. Social Security payments are reduced if you claim them before your full retirement age. Workers who sign up at age 62 in 2016 will get 25 percent smaller monthly payments than if they wait until age 66. Monthly payments increase if you delay starting them past age 66 culminating in a 32 percent bigger benefit if you sign up at age 70. If most cases, Social Security specialists pointed out the advantages and disadvantages of delaying claiming, but in eight out of 26 claims interviews the option was not discussed, GAO found.
How a lump sum reduces your payments. The Social Security Administration allows people who are at least full retirement age to take up to six months of retroactive benefits as a lump sum. Taking this lump sum is equivalent to claiming benefits six months earlier, and results in a permanent reduction in monthly payments going forward. While ten out of 20 observed interviews mentioned the lump sum option, the trade off of lower benefits in the future was mentioned only once. And one claimant who wanted to start benefits later in the year changed his mind to collect lower payments beginning six months earlier when offered the lump sum.
Temporary withholding if you work before age 66. If you sign up for Social Security before your full retirement age and earn more than a specific amount, part or all of your Social Security benefit could be temporarily withheld. However, once you turn your full retirement age your benefit amount is increased to give you credit for your withheld benefit and continued earnings. In 18 interviews where the Social Security claimant was younger than full retirement age, almost all were informed about the possibility of benefits being withheld. However, only seven of the Social Security specialists explained that the withheld payments would result in higher payments after full retirement age.
How many years of work are factored into payments. Your Social Security payments are calculated based on the 35 years in which you earn the most. If you don’t work for 35 years, zeros are averaged into the calculation and result in a smaller payout. “We observed only eight interviews in which a claims specialist mentioned that benefits are based on 35 years of earnings and that working longer could potentially raise benefits by boosting average lifetime earnings,” GAO found.
[Read: The Most Popular Ages to Sign Up for Social Security.]
The options to claim spousal benefits. Members of married couples are eligible to claim a Social Security payment worth as much as 50 percent of the higher earner’s benefit, if that’s more than they can get based on their own work record. But there are also several more complicated strategies some older couples can use to boost their payments, such as restricted spousal benefits or file-and-suspend, but only eight of 15 interviews presented these options for potentially eligible retirees.
When Social Security benefits are taxed. Part of your Social Security income is taxable if the sum of your adjusted gross income, taxable interest and half of your Social Security benefit totals more than $25,000 ($32,000 for couples). And the portion of your Social Security benefit that is taxed goes up if these income sources top $34,000 for individuals and $44,000 for couples.
Your break-even age. People who claim benefits at age 62 get reduced payments over a longer number of years, while those who start benefits at 70 get much larger payments later on in retirement. Once you live until a certain age — the break-even point — the lifetime payment amount will be equal, and if you live beyond that you will come out ahead by delayed claiming. “Break-even analysis can influence people to claim benefits earlier than they might otherwise, in part because people fear the potential loss of benefits if they die early more than they fear outliving their retirement savings,” GAO says. “Break-even analysis also ignores the insurance value of higher monthly Social Security benefits protecting against outliving one’s other retirement assets, and the potential benefit to a surviving spouse.”
The role life expectancy should play in your claiming decision. Your life expectancy plays a big role in the optimum age you should sign up for Social Security, but this is seldom pointed out in SSA interviews. “Only twice in our 30 observations did family health and longevity arise and how it might factor into when to claim benefits, both times because the claimant raised the subject,” GAO found. “Increasing life expectancy, along with increased likelihood of living to advanced age and resulting increased time spent in retirement, raise the potential cost to retirees of claiming early and receiving reduced benefits for life, especially if in these later years they have spent down other sources of retirement income.”
[See: 10 Social Security Claiming Strategies That Work.]
Whether to sign up online. The GAO observed the online application process, and found that it was more likely to include pertinent information than many face-to-face interviews. “Compared to the in-person process, online applicants have more consistent access to key information on the screen or through tabs and pop-up boxes as they complete the application,” GAO found. “Furthermore, for both face-to-face and online application methods, we found claimants were sometimes provided information that could inadvertently influence them to claim earlier than they might have otherwise.”
Emily Brandon is the author of “Pensionless: The 10-Step Solution for a Stress-Free Retirement.”
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9 Things to Consider Before Signing Up for Social Security originally appeared on usnews.com
