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There are a few areas within Social Security that you could mess up without even meaning to do things wrong. One of Devin’s most trusted mentors has often told him, “Big doors swing on little hinges.” He’s found that to be applicable to many things in life and it’s certainly true in retirement planning. The small decisions you make, when stretched over long periods, can have big consequences. Here are the five Social Security mistakes that can cost you dearly when you retire.
This doesn’t sound like a big mistake, does it? Unfortunately, the Social Security Administration (SSA) doesn’t catch these overpayments until years down the road. These things are so confusing, and they can take a lot of time to unravel. Devin used to help folks figure out why they owed money to Social Security, but it wasn’t cost effective because it took so long and it didn’t change the fact that they still owed the money.
Sometimes, you can’t help getting overpaid. The vast majority of overpayments come from exceeding the income limits on how much you can make while still receiving your full retirement check. If you are less than full retirement age, there is a limit on how much you can earn while receiving your full retirement benefit. This income limit changes from year to year, but for 2018 it is $17,040.
In a perfect world, when you filed for Social Security benefits, you’d sit down with a technician and they’d ask if you were still working, and then the benefit amount would be adjusted accordingly. In reality, that doesn’t always happen. Often, it takes a few years until the tax records and the Social Security records are compared, and then the overpayment is discovered. The Social Security Administration is going to send you an overpayment notice, and they will either want you to pay them back immediately, or they will suspend your benefit until the amount has been repaid. Neither of those is fun!
The big point here is that if you are less than full retirement age, and you are still working, you need to make sure that you understand that you probably need to proactively go up and get your benefit turned off.
Don’t automatically assume that because you get an overpayment notice from the Social Security Administration, you have actually been overpaid. They are not always correct, especially as it relates to some earnings that shouldn’t be counted towards the earnings limit.
Here are two articles that are related to this:
Messing Up Spousal or Survivor Benefit
Sometimes clients will come in and say that they want to delay taking their spousal or survivor benefits until they are aged 70, so that they can get the maximum benefit. When it comes to spousal or survivor benefits, though, that doesn’t work out.
If a spousal or survivor benefit is the highest benefit that you’ll ever receive, there is no need to delay past your full retirement age. Why? They stop increasing after that!
Survivor benefits are even more tricky. In some cases, there is no reason for a survivor to delay taking benefits beyond age 62. For example, let’s assume Jim’s full retirement age benefit was $2,000. However, he filed at 62 and began receiving and age-based reduced benefit of $1,500. He died two years later. Because of his early filing, the most his surviving spouse will receive is the greater of his actual benefit ($1,500) or 82.5% of his full retirement age benefit ($2,000 x 82.5% = $1,650).
Based on the reductions for her filing age, she’d hit the 82.5% ($1,650) of his benefit right in between age 62 and 63. Once she was was at this age, there would be no benefit to continuing to delay filing for benefits. Further delay will not increase the survivors benefit!
Social Security Survivors Benefits are deceptively complex. Devin’s put together a easy-to-understand guide here.
Not Checking Earnings Record
How confident are you that your Social Security earnings record is accurate?
Unless you’ve checked it recently, you shouldn’t be too sure.
Mistakes in an individual’s Social Security earnings record are actually much more common than most people think. Since the inception of Social Security, there have been a total of $1.2 trillion in wages that could not be matched to an earnings record. In tax year 2012 alone, the Social Security Administration reported $71 billion in wages that could not be matched to an individuals earnings record!
A mistake in your earnings history can make a big difference in how your Social Security benefits are calculated. How? It all goes back to the benefit’s formula. The Social Security Administration uses your highest 35 years of earnings as a cornerstone of the benefit calculation. If any of these 35 years are incorrect or missing altogether, the average is skewed.
Devin has written a step-by-step guide to checking your earnings record that you can use to make sure yours is correct.
Not Calculating the Tax
This is an area that is sticker shock for people when they retire. To some, it doesn’t seem fair. You’ve worked for years and paid your Social Security tax as the admission ticket to a Social Security benefit. Now that you’re collecting that benefit, you have to pay taxes? Again?
John points out that this is where a lot of the confusion comes in, because people have heard that Social Security is not taxable. That’s true, except for when it’s not. If you have other income, and that starts putting you over certain thresholds, then a portion of that Social Security will become taxable.
Today, somewhere between 0% and 85% of your Social Security payment will be included as taxable income. If you are already paying high taxes because of a pension, 401k distribution or some other income source, this could take a big bite out of your benefits check.
A discussion on taxes and Social Security requires an article of its own. You can find more reading on this topic in devin’s article, Taxes on Social Security.
Relying on the SSA for information
You would think that the Social Security Administration would be a good source of advice. Think again. Beyond the anecdotal horror stories Devin and John have heard from clients who were led astray by well meaning SSA technicians, there is hard evidence that they can, and will, screw up advising you on the best course of action. For example, the Office of the Inspector General conducted a survey that estimates they had underpaid $131.8 million in survivor benefits to 9,224 individuals. That’s just survivor benefits! There’s no telling what it would be if they could look at all benefits.
So, what do you do if you need to get some advice about Social Security? Devin has a membership group that you can join to get answers to your questions and there are other financial advisors and lawyers who specialize in Social Security. Plus, there are some ways to cut through the hierarchy at the Social Security Administration to get to someone who knows how to apply the rules to your specific situation. Devin has discussed it here Who You Should Talk To At Your Local Social Security Office.
The moral is, taking advice from Social Security representatives may be hazardous to your wealth!
Understanding these five big mistakes will hopefully help you to avoid them, and make your Social Security experience a lot easier.
Resources Mentioned In This Episode:
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