Dear Carrie: After reading guidebooks touting the benefits of taking Social Security early, I don’t trust the Social Security Administration office to give me good advice or correct information. Instead, I expect to be pressured to sign up for something, whether it’s right or wrong. Am I being paranoid? Do I need a lawyer to make sure I get what’s mine? — A Reader
Dear Reader: From the number of questions I receive about Social Security, it’s obviously a hot topic. And it’s not surprising, seeing as, according to the 2010 Pew Research Center report titled “Baby Boomers Retire,” 10,000 boomers reach age 65 every day — a trend that will continue until 2030. Plus, with pensions pretty much a thing of the past, Social Security is now a major source of guaranteed retirement income for a growing number of Americans.
With so many people dealing with when and how best to take Social Security benefits, I’ve decided to talk about a different aspect of this important topic every month. Your question is a great starting point.
I don’t believe that the Social Security Administration is out to intentionally mislead us, but the system is extraordinarily complicated. And of course, it’s always possible that an agent will misinterpret your question or even make a mistake. Therefore, it’s always wise to be vigilant and double-check the information you receive.
But beyond concerns about the SSA, when to start taking benefits is a major decision impacting not only your own retirement income but also that of your spouse or eventual survivors. So rather than an attorney, I’d suggest that a financial professional who has studied the Social Security system would be your best resource for advice. However, I also think it makes sense for you to have an understanding of how the SSA calculates benefits so that you can be your own advocate.
Understand What the SSA Can — and Can’t — Do for You
SSA representatives aren’t financial advisers. They’re trained in how the Social Security system operates, not in delivering personalized advice. So though they should be able to provide answers to factual questions — such as how benefits are calculated, taxed or withheld — they aren’t necessarily the best people to help you weigh the pros and cons of taking benefits now versus later or with how to coordinate benefits with your spouse.
Review the Facts, and Know the Lingo
If you are going to speak with an SSA representative, it will help to have the basics at your fingertips — and to understand some of the basic Social Security vocabulary. So let’s do a quick review:
♦FRA. This is your full retirement age, when you’re eligible to receive your full Social Security benefits (66 for those born between 1943 and 1954). You could take them sooner — as early as age 62 — but your monthly benefit would be permanently reduced by about 25 percent.
♦PIA. This stands for primary insurance amount, which is the basic benefit you receive if you wait until you reach your FRA to collect.
♦Delayed retirement credits. These are credits you accrue if you wait past your FRA to collect. These delayed retirement credits translate into an 8 percent increase in benefits for every year you delay collecting, up to age 70. Note, though, that delayed retirement credits will not increase the benefit for your spouse.
Up to this point, it’s pretty straightforward. You can either collect early and get a smaller payment for a longer period of time or collect at FRA or later and get a larger payment for a shorter period of time. Nevertheless, according to the SSA, 75 percent of workers start taking benefits before 66. In theory, it should all balance out when looking at the averages. But when it comes to individuals, the differences can be vast, so it’s important not to stop there.
Look Beyond the Numbers
Though the basic numbers are fairly clear — you can go online and get estimates of your benefit by age — there’s more to consider when it comes to your own timing decision. So before you talk to anyone, ask yourself some questions, such as:
♦Do you need the money? If you don’t have enough savings and are dependent on Social Security to pay for necessities, you may have no choice but to collect sooner rather than later.
♦Will you continue to work? If you collect before your FRA, some of your benefits will be temporarily withheld if you earn over a certain annual amount. Also, regardless of your age, up to 85 percent of your benefits may be subject to income tax, depending on your income.
♦What about life expectancy? With the typical 65-year-old today living to age 83 and 1 in 5 living to age 90, according to the SSA (the numbers are even higher for women), taking benefits later could help mitigate the risk of outliving your money.
♦Are you married? Do you have dependents? You’ll want to consider how your decision will affect spousal and survivor benefits.
♦Are you receiving a government pension? If you receive a pension based on work for which you didn’t pay Social Security taxes, your benefit may be reduced. Ditto for spousal and survivor benefits.
Talk to a Financial Adviser
Once you have a basic idea of the numbers and how your personal circumstances could impact your benefit, you may want to consult with your financial adviser. If he or she doesn’t have a sophisticated understanding of the Social Security system, seek out one who does. That person can then help you run different scenarios and make an informed decision.
Of course, this is just the tip of the iceberg. In the coming months, I’ll get into more complicated issues, such as Social Security strategies for couples and collecting benefits on your ex’s work record. So stay tuned; the plot will thicken as we delve deeper into the intricacies of Social Security.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at firstname.lastname@example.org.