2023 EP0617 | Financial Updates | 5 Social Security Surprises that Could Cut Your Benefits

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Peter, good to see you. Today we have five Social Security Surprises that could cut your benefits. Figuring out the most financially optimal time to claim Social Security is always very complicated, but making it even more difficult. Hidden deep within Social Security's handbook are a few gotchas that can reduce your benefits forever. So the first one, if you take two benefits at once, you lose one of the two.

Explain what that means, please. Yeah, well, Social Security was a system designed in 1935 to prevent poverty in disabled senior elderly populations. So it is not what is intended to provide the full amount of living expenses for really anyone. Unfortunately, about 40 percent of Americans do rely exclusively on Social Security. And that really indicates that we are not saving and preparing well enough for our own retirement. Now, there used to be a lot of different strategies to sort of coordinate benefits between a married couple.

And there still are a few provisions. But the bottom line is that one person only receives the equivalent of one benefit. You can't double dip, so to speak, and be claiming your own benefit plus a spousal supplement. Or if somebody passes away out of a married couple, you don't receive the survivor widows benefit plus your own benefit. One person only receives the equivalent of one benefit.

And there are a couple instances where you may have some offset of some type. And specifically in North Carolina, with state employees, there is a step up or an offset for people retiring before Social Security age, where the North Carolina retirement system will pay out an additional supplement up until you reach Social Security eligibility age. But there are some provisions there where if you plan on retiring from North Carolina yet still continuing to work, that may not be optimal and you really need to calculate out what it looks like with that stepped up pre-62 benefit versus what a life expectancy of income looks like with the lower Social Security amount that will result.

And nationally, I deal with clients across the nation. There are certain states where government workers, teachers in particular, have what's called a WEP, a windfall elimination provision where the state retirement system basically excludes them from Social Security altogether. Railroad workers have kind of the same thing with their retirement system. So there are a lot of instances, Erin, you're right, where you won't be collecting two benefits and a lot of people aren't really aware of that. So it is something to really educate yourself on which benefit am I getting and how do I optimize that benefit to the fullest extent. It sounds like that leads into our next point, too. If you're forced to take your retirement benefit at the same time as your spousal or divorce spousal benefit, your retirement benefit will generally wipe out your spousal or divorced spousal benefit. Right. And this is an important component now more than ever. Unfortunately, we've talked really recently here about the phenomenon of gray divorce.

Right. What if there was a homemaker spouse that raised the children that wasn't income earning? Well, the Social Security administration, in fact, was designed for that individual in mind.

In fact, in 1935, most households were single income household. Well, what if the income earning spouse does decide to get divorced right on the eve of Social Security? The system's designed not to leave that other person in complete poverty just because they were the homemaker for the duration of the marriage or raising the children or whatever. But they are not entitled to the full amount of the spouse's benefit. They're entitled to the spousal benefit, which is only half. So, again, we we need to look at and coordinate the benefits carefully. And, yes, that spousal benefit may wipe out.

And this is sort of dovetailing into a couple other issues here. But even if you were income earning, if that spousal benefit is higher than your own, then you're not going to get your own benefit. So, again, just knowing how to coordinate benefits, even though they did away with what they called unintended loopholes and a lot of what was called advanced claiming strategies, you still have to coordinate your benefits. And just a single individual has nine full year increments that they could claim and collect, which means a married couple or a divorced couple has up to 81 potential different combinations. And there are actually far more options than that.

You've got to crunch the numbers carefully for your situation. Right. Right. Let's talk about the third surprise here. Taking benefits before full retirement age leads to permanently reduced retirement benefits. That one may not be so surprising. But what I found surprising, Peter, was how many people claim as soon as they're able at 62.

Well, yeah. And looking at the chart here, it is a good portion of people who claim before that full retirement age, which has now moved up for the most part to 67 for people now claiming and collecting. But a lot of people run out and get it at 62. Maybe it's not surprising, but unfortunately, I think a lot of people are under the assumption that their benefit will bump up.

That's not the case. When you reach full retirement age, if you have claimed and collected in previous years or at 62, you do not bump up to that full retirement age number. That is a permanent decision. And in fact, not only is it a lifelong decision, it affects you and your spouse even after your own life because of the survivorship implications. So again, this is really important to understand the consequences of when and how you claim Social Security because you are locking into a reduced benefit. And the spousal benefit would also therefore be reduced if you or your spouse or you and your spouse claim and collect before that full retirement age for the duration of both of your lifetimes.

Okay, explain this next one to me. You can contribute to Social Security your entire working life and receive nothing whatsoever in extra benefits. Yeah, this is dealing with that spousal benefit, right? If you were an income earning couple, both people were income earning. However, one spouse earned substantially more than the other. Then when the lower income earner goes to claim and collect, well, their own earnings won't matter if the half of the higher income earners, the spousal benefits are higher. So technically, the way Social Security equates that or calculates that is you get your own benefit plus a spousal supplement, but really it's half of the higher income earners amount.

So your own benefit really doesn't even factor into the equation. Now, there is a penalty for claiming early and also earning income and you've got to be aware of that the penalty for double dipping in the government size. If you're capable and able bodied and you go out and claim and collect before your full retirement age, there's going to be an even further penalty. If you earn more than a certain amount and that certain amounts pretty low $21,040, I believe it is this year.

It's inflate $21,240. It's inflation adjusted each year, but they take back a dollar of Social Security for every $2 you earn above that. And there is something called deemed filing, where if you have filed on the spousal benefits, you can't flip over to your own later on unless that is from a deceased spouse. If your spouse has passed away, it is still possible for you to claim off the spousal benefit and let your own benefit continue to grow and accrue. And this may be a good strategy if by your own benefit continuing to grow and accrue at some point in time, it will surpass the survivor benefit.

And I've seen that in a couple situations as well. And then the last surprise that we wanted to chat about when you claim, of course, can cost you big bucks. You touched on that with people who claim at age 62. But I think it helps to look at this chart to recognize how significantly your benefits are reduced the earlier you claim.

Yeah. And you look at this chart and wow, there's a difference. But this is a monthly amount of income. Well, there's 12 months in a year and possibly 25, 30, 35 years in retirement.

The amount of income difference that this can make is substantial. I've seen it make as as much as a couple hundred to three hundred thousand dollars or more difference to average life expectancy. And if you are one in the population who has made it to sixty five and you're still healthy, well, guess what? Odds are that you are part of the population that brings up that average life expectancy.

Your lifespan is likely expected to exceed life expectancy. Now, here's the thing with these Social Security calculators, those lines converge at a certain point in time. And roughly 60 to full retirement age 70. Those lines all seem when you run the calculators to converge somewhere around age 80 or so, give or take a few years. Average life expectancy is now 87 to 89 for males or females. And again, we're we're by and large talking to people who are on the verge of claiming collecting.

Likely they exceed the average life expectancy. And so waiting to delay and claim and collect Social Security to that later date looks like it would be the most profitable for every year that passes after those lines converge. Here's the thing is that those Social Security calculators don't include your own assets. So if you are delaying taking Social Security, but you are using your own assets in the meantime, we have to factor that into the equation for where those lines converge and the potential return on investment of your own personal assets that would have occurred might push that break even point out even further. So bottom line, Aaron, it's something you've got to work through. We help people optimize the Social Security strategies that are available and the timing of that. And nobody knows the day that we are going to go, but we can make some educated decisions on Social Security once we see the numbers, lay out the options and then look at your own specific timeline and retirement goals.

It's so much more than like you mentioned, a calculator really should be a conversation with a professional who can look at all these different variables. Peter, thanks for walking through that. That was complicated, but I really appreciate your time. If somebody has questions then about when or how they claim or how that should fit in with other benefits, what's the best way to reach you? Yeah, reach out to us.

We're happy to work through this. In fact, it's part of our optimized retirement plan. Specifically, we look at income investments, taxes, health care legacy.

Well, Social Security falls into that income sub topic and category of the optimized retirement plan will help run the reports for you so you can better understand all the claiming options that you have. Maybe identify a strategy you didn't know about. Give us a call. 919-300-5886, 919-300-5886. Or you can email me, peter at rishanplanning.com or visit the website and be in touch that way, rishanplanning.com. It looks like richonplanning.com. All right, Peter, thank you.

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