Social Security has been in the headlines lately, as Congress put the kibosh on a claiming strategy called file and suspend. This option, which expires on April 30, has been a way for married couples to maximize the benefit coming into the household.
Here’s how it works: At full retirement age, the higher-earning spouse files for his or her Social Security benefit, but immediately suspends it. This allows the higher-earning spouse’s benefit to continue growing at a rate of 8 percent per year until age 70.
Meanwhile, the lower-earning spouse, at full retirement age, files an application for a restricted spousal benefit based on the higher earner’s record. The lower earner’s benefit also continues to grow. If, at some future date, up until age 70, the lower earner’s benefit becomes greater than half of the higher earner’s, then the lower earner will switch to his or her own.
The strategy is only available to higher earners born on or before April 30, 1950.
It’s actually more complicated to explain file and suspend than it is to put the claiming strategy in motion. But it’s not the only complex aspect of Social Security that trips up Americans. Claiming strategies remain complicated, and the rules are murky, even with the removal of the file-and-suspend option.
Here are four other common Social Security mistakes people make:
Believing Social Security will provide the bulk of their retirement income. According to the Social Security Administration, the benefit replaces about 40 percent of preretirement income for the average worker. That means people must determine other income sources if they want to sustain preretirement lifestyles.
“It’s likely that Social Security will provide a smaller portion of retirement income than you expect, so it may be unwise to rely too heavily on it,” says Larry Rosenthal, president of Rosenthal Wealth Management Group in Manassas, Virginia.
Not understanding how spousal benefits work. Spousal benefits, even after the demise of file and suspend, are a good way to increase a household’s total income. However, many retirees believe that taking a spousal benefit may actually reduce a couple’s overall benefit.
“People think that it will reduce the other person’s benefit. They don’t understand that it has no effect on the primary earner’s benefits,” says Ken Moraif, senior advisor at Money Matters in Plano, Texas.
For example, if the lower-earning spouse claims a benefit based on the higher earner’s record, the higher earner’s benefit remains the same.
Misunderstanding your full Social Security retirement. This is a confusing topic, perhaps because Americans are required to apply for Medicare benefits around their 65th birthday. In reality, the last time the full retirement age of 65 applied to Social Security benefits was for people born in 1937.
Nonetheless, many Americans continue to believe their full retirement age is 65. Others are slightly more informed and believe it’s 66, but even that can be wrong. For people born between 1943 and 1954, the full retirement age is 66, and it goes up incrementally after that, until 1960. For people born in that year or later, the full retirement age is 67.
“Sixty-six may not be the actual number, depending on the year that you were born,” Moraif says.
For example, a person born in 1955 has a full retirement age of 66 and two months. When making financial planning decisions, that difference could be significant if a person wants to quit his or her job at a certain time and is counting on Social Security income to help make up the difference.
Believing you will lose your benefit if you earn income after retirement. “Money you earn after you retire will only affect your Social Security benefit if you’re under full retirement age,” Rosenthal says.
For people who begin taking their benefit before their full retirement age and plan to continue working, Social Security will withhold $1 in benefits for every $2 that’s earned above $15,720. That earnings threshold didn’t change in 2016, but it goes up over time.
Confusion about that threshold stems from the age at which it applies. After full retirement age, a person can earn as much as he or she wants and may collect the full benefit without any earnings test penalty.
There’s an important note about the earnings test: After full retirement age, the amount withheld is gradually paid back. However, retirees should remember that claiming Social Security before full retirement age means their monthly benefit remains low for the rest of their lives.