Planning when to claim Social Security can feel like stepping on a financial tightrope; a single error can cost retirees thousands of dollars over their golden years.
Kim Gattis, CFP, senior vice president and manager of Financial Planning and Private Wealth at UMB Bank, shared her expertise with GOBankingRates as part of its Top 100 Money Experts series to assist with the balancing act.
Gattis emphasized that determining when to begin receiving Social Security is not a straightforward process. “The decision about when to start receiving Social Security is far from one-size-fits-all,” she told me.
Personal factors such as health, other income sources, lifestyle requirements, and spousal benefits all have an impact. Claiming at the earliest possible age of 62 may provide income sooner, but it will permanently reduce your monthly checks. Waiting until full retirement age (66 or 67, depending on your birth year) results in larger lifetime payments.
Some employees believe it is best to begin benefits early while still employed, but Gattis cautioned that this can be costly.
“While these benefits will be repaid through higher monthly payments once you reach FRA, many people don’t know they may not be receiving their entire Social Security monthly benefit if they have other earned income,” according to her. If you earn more than certain limits, the earnings test may temporarily reduce your payments, causing you to lose a significant amount of money before those reductions are recalculated.
Why timing isn’t everything in your Social Security plan
Another common misconception, Gattis said, is that waiting until you’re 70 is always the best option. Delaying benefits increases monthly income through delayed retirement credits, but it can deplete other assets that would otherwise grow.
“While waiting until age 70 to claim your benefits will increase your monthly payment amount, it’s also important to think about the amount you’ll be using from your retirement savings during that time and how the growth potential of funds left in those accounts may offset waiting for a higher Social Security benefit,” according to Gattis.
In other words, withdrawing too much from investment accounts while waiting for higher Social Security payments may result in lower overall wealth in the long run. The key, she explained, is to weigh your projected benefits against potential investment growth before deciding whether to delay.
Gattis also sees retirees fall into what she refers to as the “bucket” mindset, in which they divide their income sources too strictly and refuse to spend from their savings.
“This, in turn, will sometimes cause clients to reduce spending and lifestyle choices they could maintain while delaying Social Security benefits,” she told me. Many people end up living too conservatively, sacrificing quality of life in retirement for a future payout that may not provide much more freedom.
Another easily overlooked error concerns the accuracy of one’s earnings record. Mistakes occur even within the Social Security Administration.
“Everyone should check their earnings history with the Social Security Administration to ensure their earnings are correct,” according to Gattis. “Social Security benefits are based on your highest 35 years of earnings and vary depending on how much you earn and when you choose to start benefits.” An incorrect record could permanently reduce your monthly benefit, so it is critical to review your “my Social Security” account and correct discrepancies as soon as possible.
Gattis also mentioned the new opportunities created by the Social Security Fairness Act, which altered the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO).
These changes increased eligibility for certain workers who were previously unable to receive benefits due to their pension status. “If someone did not file for benefits because they knew they would not receive benefits due to the WEP/GPO provision, then they now need to file an application with the Social Security Administration,” Gattis told me.
The final and possibly most serious mistake Gattis identified is attempting to make these decisions without professional assistance.
“Work with your financial advisor and team, and do your homework prior to filing to ensure you understand all the benefits you’re entitled to and the rules around those benefits,” she stressed.
“The Social Security Administration website has many helpful tools and information, and your financial planner can use software programs to illustrate your options and help you reach the optimal decision.”
