Top 10 Social Security Myths
Two surveys conducted in 2015 demonstrate just how little the average American knows about Social Security benefits. Only 28% of the more than 1,500 adults who took an online quiz about basic Social Security facts received a passing grade, according to one survey sponsored by Massachusetts Mutual Life Insurance Co. And the vast majority of more than 900 current and future retirees age 50 and older who participated in a different survey sponsored by Nationwide Retirement Institute said they are worried about the Social Security running out of money during their lifetimes. That could prompt some to claim benefits earlier than they should.
Here are the most popular misconceptions about Social Security and the facts everyone should know to make educated claiming decisions.
Myth #1 Claim benefits early before the system runs out of money.
The facts: Even if Congress does nothing between now and 2034 when the Social Security trust funds are projected to run dry, there would still be sufficient funds from FICA taxes to fund about 75% of promised retirement and survivor benefits. But it is highly unlikely that lawmakers would let the most popular and successful government program in history reach that point. Future changes, which are likely to take effect decades from now, could include raising the full retirement age, boosting payroll taxes or altering the benefit formula.
Myth #2 It doesn’t matter when you claim benefits.
The facts: The age when you claim benefits makes a huge difference in the amount you will receive for the rest of your life. Claim Social Security at the earliest age of 62 and you will receive a permanent 25% cut in retirement benefits compared to full benefits at 66. Wait until 70 to claim benefits and receive a 32% boost above your full retirement age amount. Claiming benefits at 70 rather than 62 would result in a 76% increase in monthly income.
Myth #3 Working while collecting Social Security has no impact on the benefit amount.
The truth: Wrong! If you claim Social Security benefits before your full retirement age and continue to work, your benefits will be temporarily reduced by $1 for every $2 you earn above $15,720 in 2015 and 2016. There is a higher earnings cap in the year you reach full retirement age. If you plan to keep working, it is better to wait until the magic age of 66 to claim benefits when earnings restrictions disappear.
Myth #4 Everyone should file and suspend at 66.
The facts: Although filing and suspending is a powerful strategy that can allow a married worker to trigger benefits for a spouse or minor dependent child while the worker’s own retirement benefits continue to grow until age 70, it is not appropriate for everyone. Each person is allowed one choice when claiming Social Security. If you file and suspend, it would preclude you from using a different strategy of restricting your claim to spousal benefits which might be a better choice in some cases.
Myth #5 Claim spousal benefits early and switch to your own maximum retirement benefit at 70.
The truth: No. If you claim Social Security benefits before full retirement age, you can’t select which benefit to receive. You must collect your own reduced retirement benefits first and would receive an additional amount only if your spousal benefit — also reduced for early claiming — were higher than your own. But if you wait until 66, you can restrict your claim to spousal benefits, receiving half of your mate’s benefit amount, and switch to your own larger benefit at 70.
Myth #6 Divorced spouses are out of luck when it comes to collecting on an ex.
The facts: Benefits available to divorced spouses were among the least understood Social Security benefits, according to the recent Nationwide survey. As long as you were married at least 10 years, are divorced and currently single, you can collect on a former spouse’s earnings record. But basic claiming rules apply. For some, waiting until 66 to file a restricted claim to spousal benefits while allowing their own benefits to earn delayed retirement credits may be a smarter move.
Myth #7 There is no magic claiming strategy to maximize benefits for unmarried individuals.
The truth: On the contrary, file and suspending benefits at 66 can be a powerful strategy for singles because it acts as an insurance policy. At any point up to age 70, an individual can request a lump sum payout of benefits back to the date of suspension instead of the 8% per year increase. Normally, maximum lump sum retroactive payments are limited to six months.
Myth #8 If a worker delays collecting Social Security until 70, his spouse will receive half of his maximum benefit.
The truth: No. The maximum spousal benefits is worth 50% of the worker’s full retirement age amount. But if the worker delays benefits until 70 and later dies, the remaining spouse will collect a survivor benefit worth 100% of what the deceased worker collected — including any delayed retirement credits.
Myth #9 Social Security benefits are tax free.
The facts: Depending on income, up to 85% of Social Security benefits may be taxed. Individuals with modified adjusted gross income, which includes tax-free interest, above $34,000 or married couples with MAGI of $44,000 or more pay the maximum tax on benefits.
Myth #10 A Social Security claiming decision is forever.
The truth: Breathe easy. A hasty claiming decision can be reversed. If you withdraw your application for benefits within a year of first claiming and repay all the benefits you have received, you can wipe the slate clean and receive higher benefits at a later date. If you miss the 12-month window, you can suspend benefits at 66 — but not repay them — and earn delayed retirement credits of 8% per year up until age 70.
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