Which of These 5 Social Security Myths Will Wreck Your Retirement
Category: Financial and taxes in retirement
February 15, 2022 — Everybody knows some things about Social Security, the benefit that changed retirement for the good when it was signed into law in 1935. Unfortunately, some of the items many people think they know either aren’t true, or are just plain wrong. This misinformation could have a serious and negative impact on the decisions they make, and their ultimate retirement well-being. One of the sources used in this article are the results from our 2020 Social Security IQ Quiz , where we looked at the answers that people tended to get wrong the most.
- How many years you work doesn’t really affect your Social Security benefit that much.
Only 49% of people who took our 2020 quiz got this answer correct. The choices for how many earning years are used to calculate your benefit were 25, 30, or 35 – and the correct answer is that Social Security calculates your benefit on your highest 35 earning years (adjusted for inflation). While that might not seem that important a detail, it is, because every year you had no earnings counts as a zero!
Most people underestimated the number of years used in the calculation. To earn any benefit at all, the minimum number of earning quarters is 40 (10 years). But after you reach that important level, your goal should be to try to add as many years of earnings as you can. It might be that you had some years of low earnings, or you were out of the workforce for an extended period. Each earning year you add to your credit can replace a zero or low earning year with one where you earned more, and that will boost the calculation of how much your benefit will be.
2. When you hit Full Retirement Age (FRA) you should definitely claim your Social Security retirement benefit, if not before.
Many people mistakenly believe that their maximum SS benefit is reached at their Full Retirement Age (67 for people born in 1960 or later). But if you can afford to wait, your benefit increases by 8% for each year you postpone past your Full Retirement Age (up to age 70). So delaying your benefit by 3 years will make it 24% higher for the rest of your life (e.g.; $480 a month more on an original benefit of $2000). That higher amount will be indexed each year for inflation. And not only that, when you die your spouse will be eligible for your higher benefit for the rest of their life. That 8% annual increase is a sure thing, something that isn’t guaranteed if you try investing the money yourself. Of course there are situations when Full Retirement Age, or even earlier, is the right time to take it, especially if you have serious health issues or have nothing else to live on. Only 52% answered this question correctly, with most people underestimating the annual percentage increase. (See Full Retirement Age Chart)
3. Your spouse will get their full spousal benefit once you reach Full Retirement Age
The correct answer is that you can receive a spousal benefit that is 50% of your spouse’s benefit, IF you start collecting at YOUR Full Retirement Age. But if you choose to begin receiving spousal benefits before YOU reach Full Retirement Age, the amount will be permanently reduced. People who misunderstand this will get a reduced benefit for the rest of their lives. Only 51% knew the correct answer to this. Some 40% incorrectly thought that they could get a 50% benefit if they took the spousal benefit at age 62 (which actually could be as small as 32.5%). See SSA Spousal Benefit.
4. It doesn’t pay to work once you start taking Social Security.
We have heard people on this site say that it doesn’t pay to work after you take Social Security, especially if you have not yet reached Full Retirement Age. Yes, there is a short term penalty If you continue to work after taking benefits; $1 of every $2 of earnings over $18,690 will be withheld until you reach your FRA. In the year you reach your FRA the earnings limit is higher, $50,520, and then only $1 of every $3 is withheld. After you reach your FRA nothing is withheld. But here is the thing these folks are missing – you will get all that withheld income back in future Social Security checks. And, by adding more earning years, there is a good chance that you will have boosted your 35 year benefit calculation.
There are a few small drawbacks to working, however. If a single person earns more than $25,000 in total, 50% of your SS benefit becomes taxable, and that goes to 85% if it exceeds $34,000. Also, your Medicare Part B premiums start increasing when your income exceeds $91,000 (by $68/mo. at that level). SSA has a Calculator to determine how much your benefits might be reduced.
5. I should claim as soon as I can, since once the Social Security Trust Funds are exhausted in 2033, there won’t be anything left to pay.
Of all the reasons we hear people say why they claim their Social Security as soon as they can, this is probably the most common (another is that they don’t think they will live that long). It is true that the retirement portion of the Social Security Trust Funds will be exhausted by 2033. But that ignores the fact that working people continue to pay money into the system based on their earnings. Those are available to pay current benefits. It is estimated that even if nothing else is done, those funds will be able to pay about 78% of promised benefits. Another important factor is that, even though we have some zany legislators in the U.S. Congress, we can’t think of one suicidal enough to vote against a program to preserve Social Security. The AARP/baby boomer lobby is just way too powerful for that to happen.
Bottom line
Check yourself out against these common misconceptions. Are you harboring some misinformation that might affect your decision making? If you have doubts, talk to someone – perhaps at the Social Security Administration, your accountant, or a tax professional. Not that they are all free of personal bias, but by talking out you have a chance at arriving at the right decision for you.
Comments? Please share your thoughts about these misconceptions in the Comments section below.
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Comments on "Which of These 5 Social Security Myths Will Wreck Your Retirement"
JCarol says:
Math correction on point #1. Delaying a benefit 3 years will make it 24% higher, not 124% higher.
The biggest mistake I've seen people make with SS is not considering it one of the most important financial decisions they will make for their retirement, and RESEARCHING it with that in mind.
Going to an SS office for advice from the clerk waiting on you is not research. Talking to your brother-in-law (unless he's an expert) is not research. Even financial advisors are not always well-versed in SS strategies and their advice sometimes reflect personal political biases (SS will run out of money - better file at 62 and get it while you can.).
Research is going to the SS website and learning what you can there, then getting books written by bona fide experts (Laurence J. Kotlikoff comes to mind) and reading them cover to cover. It's going to websites hosted by experts and running the numbers in their calculators. And if you have to pay a little bit to do so, you'll still be way ahead of the game in the long run.
I spent many, many hours learning about SS before devising a strategy for DH and me. When friends our age who took SS early ask about our SS they're shocked at our plan and astounded that they didn't know they could have done the same - or that their brother-in-law, tax preparer, or the SS clerk didn't walk them through all the possibilities.
p.s. I've known several people who got (and took) lousy advice from SS employees. To be fair, their job isn't to counsel people on every option available to them, it's to answer specific questions, get the paperwork filled out, and move onto the next person in line. Tax preparers' expertise is tax law, not SS benefits. Accountants may or may not be up on SS benefits depending on their age. Accountants in their late 50s and beyond are a better bet than those in their 30s.
My best advice to anyone approaching SS age? Look for experts in that field and research diligently.
Comment from John Brady: Thank JCarol- excellent catch on your correction. Also, great advice about "advice". A lot of the "experts" have their own biases or knowledge gaps. "Look for experts in that field and research diligently" - well said!
John Brady says:
I was fortunate to have a long career with high earnings. Then I delayed taking Social Security to age 70 because I had other sources to use. When I took my statement to my accountant for him to prepare the return, he said he had never seen anyone get that high a benefit from SS. So, having 35 high earning years and waiting to age 70 to take Social Security definitely pay off. The problem is that is generally only relatively affluent people like me who are able to wait. But if you can, do it!
Louise says:
In Article 1 below, it gives examples of the most SS you can get at ages 62, 66 & 2 months, and 70.
If you do the calculation without COLA adjustments, the person who draws at age 62 for 18 years until they are 80 years old, will collect a bit more than a person starting to draw SS at age 70 and continues till age 80.
This is just an example of two people living till age 80.
Person 1 starts collecting at age 62.
Person 2 starts collecting at age 70.
Person 1, age 62 starts collecting SS, benefit $2,364.00 a month (according to Article 1 below). That would be $28,368.00 a year multiplied by 18 years. Total collected: $510,624 (Person 1 is now 80 years old).
Person 2, age 70 starts collecting SS, benefit $4,194.00 a month (according to Article 1 below). That would be $50,328.00 a year multiplied by 10 years. Total collected: $503,280 (Person 2 is now 80 years old).
I am not arguing that the longer you live the more the person who waited till age 70 will collect more. However, Life expectancy in the USA, is 80.2 years for women and 76.3 for men as seen in Article 2 below.
There is no guarantee if you will collect for one month or 40 years! Some people never collect one check due to dying at a young age.
Another thing to consider is that a higher income will increase Part B premium costs as seen in Article 3 below.
Article 1: https://www.aarp.org/retirement/social-security/questions-answers/maximum-ss-benefit.html
Article 2: https://usafacts.org/data/topics/people-society/health/longevity/life-expectancy/?utm_source=bing&utm_medium=cpc&utm_campaign=ND-StatsData&msclkid=eb961d58f20a1c577a547f4f9d1c0a9b
Article 3: https://www.medicare.gov/your-medicare-costs/part-b-costs
Editor's comment: Thanks Louise for these helpful thoughts. Couldn't agree more, there is no guarantee you might collect for 4 months or 40 years. Two things to add to the discussion: 1, you have to consider the impact of getting COLA's on a larger benefit. If you collect for 15 years at a higher base those COLAs are going to make a very big difference. 2, you have to consider life expectancy at age 62, not birth. For men it is just over 20 years (82), for women it is just under 23 (85).
Jim Paille says:
What I never can find is the common scenario that the spouse made substantially less income. Waiting 4 years (to 70) is usually not the right thing to do since the spouse collecting earlier will be on their own earnings. For example my spouse gets a $625 a month bump when I started collecting - that much more than offsets the 8% bumps. For transparency I waited from 66 to 68 and now started collecting thus triggering my spouse getting the bump. Doing this math is quite stressful. Not to mention picking the right Medicare part BCD and the other alphabet soup! :) good calculating !!
Mike says:
I’ve seen many publications and have talked to “financial planners” who say wait until you reach full retirement age. That should be an immediate red flag! If a “planner” tells you that without learning about your situation he or she is lazy and doesn’t have your best interest at hand. Here’s why I’ll be taking as at 62. I have two options- take asap or wait until fra but I still need the income to live off of. By taking ss right away I keep the $2000 (using the article’s example) I keep $104,000 in the 401k earning interest which I lose by holding off until fra. When you calculate the lost earnings from interest and ss itself and add in the money I need to use from 401k my break even age is 93.
Regarding the comment of no politician would commit political suicide by voting against ss it is happening and it’s not suicide. First of all there are people out there who want to do away with ss in the baby boomer Aarp voting block. Second very few people are single issue voters so ss is something that people will consider but even if they want ss to be funded other issues may cause them to vote for a politician who wants to defund ss. Finally in order to get rid of it you just have to keep the status quo and then when the time comes and after enough soft branding against ss you shift the mindset against it and say it’s not a good program and is unsustainable. It’s happening right now. I’m a realist - this country is very divided politically right now and only getting worse and that makes it easier for politicians to kick the ss can down the road which could lead to it’s demise. Assuming ss is going to be around is foolish imho. The time for urgency is now - 11 years will go quickly! Good luck to everyone out there in your retirement!
HEF says:
A lot of the Soc Sec. rules have changed in the last 8 yrs. My DH planned to work well into his 60s but ended up leaving his job at 61 on disability. Soc. Sec.Dis. Insur. kicked in soon after and they paid out an amount equal to his Full Retirement Age amount - even then. He is younger than me so I thought I had to wait until HE turned his FRA before I could collect the extra against his income. I waited until I was FRA and when I applied, I was able to recieve the extra "bump" to bring it to half of his, immediately. It has all been very helpful to ease us into retirement and we've been able to save towards that ultimate Retirement Castle (ccrc) in future.
JCarol says:
My parents and parents-in-law all lived into their nineties. DH and I are in good health at 69. Odds are strong that at least one of us will survive long enough to be grateful we waited to draw our larger earner's SS at age 70.
I started SS at age 65. At 66 DH started claiming spousal benefits against my earnings. At age 70 he will draw his SS and I'll continue with mine (more than if I draw 50% of his).
For now we supplement our income with part-time remote consulting. The work is enjoyable and we can travel while doing it. It not only keeps us engaged with people and an industry we like, but when added to our monthly 150% of my SS benefits, our earnings keep us from dipping into our retirement accounts.
As for what will happen to SS in the future, that's anyone's guess. However, there are currently 75 million Americans aged 60 and over who are already collecting SS or are counting on it. Throw in those over 55 and we're talking nearly 110 million people.
It seems doubtful that federal politicians would suggest decreasing the amounts promised to this incredibly large voting bloc. Now add in adult children and other relatives who'll quickly realize their own finances will be in jeopardy if they need to pick up the slack for suddenly insolvent elderly family members.
I don't see this happening. Talk about awakening a sleeping giant and motivating it to get to the polls...
Daryl says:
I worked alongside another up-and-coming voting bloc of male college educated twenty-somethings who regularly discussed ending Social Security since they were tired of supporting these old farts and would never get a chance to collect SS themselves. They said if you didn’t save enough by 65 to finance the rest of your life, you deserve to die. They were enthusiastic voters. So I wonder how the politicians will court them while discounting us. Maybe we’ll all have to stand in line for hours to vote in person and that will limit the old fart vote. I’m not as trusting.
LS says:
As for the younger individual's distrust of future SS payments, I'm afraid they will learn a very important lesson. There are very many people who are not interested in or able to invest sufficiently to enable a secure retirement without additional regular income such as a pension or SS. With company paid pensions disappearing rapidly, SS becomes even more important for these folks. I have tried to encourage my sons to invest in their company's 401k plan and to set up a Roth IRA and fund them as much as they can. If SS payments do get reduced, or disappear altogether, they will have something put away to rely on during retirement. However, I am concerned about the type of "investments" two of them are making. One is putting funds in a Bitcoin ETF. Another is doing crypto mining with his roommate. To me, crypto is not investing but gambling. Yes, some fortunes have been made but even more have lost much of what they "invested".
Another son has bought gold and is paying to have it stored. This too is not, in my opinion, a suitable investment that you can rely on for income at retirement. The value of gold fluctuates greatly and you can derive no regular income from it. You are only hoping that the value of your holdings will go up while you hold it. I will continue to encourage more suitable investments for retirement purposes but hopefully, younger folks like my sons will come to realize the importance of SS and pensions over trendy and get rich quick ventures.
Louise says:
LS, I highly agree with you and your suggestions of 401k and Roth IRA's for your sons.
I believe 401k came about around 1978 but my husband and I could not start contributing till about 10 years later. Not all companies offered them back then and we didn't make enough money to contribute. I finally got a job that offered 401k. I started as a temp and had to wait 9 months before they made me a permanent employee. I wanted to get into the 401k immediately, but they had a rule in place you had to be with the company a year to join. The day I was there one year, I was filling out those papers to join. My husband's company finally had a plan too. He joined as soon as they offered it. We had a lot of catch up to do. I was about 35 when I started contributing and between two companies, I was able to contribute for 22 years. The second company did not offer a match though and that was for 4 years.
My husband and I were able to save a lot and if we had been even more frugal, we could have done much better than we did.
I know nothing of bit coin and EFT's. Have heard of them but don't know much. I only wish I could have contributed to 401k at an even younger age.
I hope your sons listen to you!
Tom says:
Great info. My wife has cancer and will probably pass before I do. She is 70 as am I. I started collecting at age 64 and she waited until age 66 (FRA). She earns more SS than I do and when she passes, I'll take over her SS and quit mine. Is that how it works? Has anyone gone through this process? What do I need? Thanks.
JCarol says:
LS, you bring up a great point. Another poor strategy is being paid "under the table." Seems like a terrific idea at the time. After all, who wouldn't want a bigger paycheck because no taxes are being taken out? No big deal when you're in high school and doing casual labor like occasional babysitting, cleaning out a neighbor's garage or lawn mowing.
Sad to say though, plenty of American adults' lifelong wages have mostly gone unreported to SS and other government entities. Employers may seem to be doing their employees a big favor at the time, but in truth those employers are saving themselves money by not paying their own portions of SS, Medicare and unemployment insurance payroll taxes
When it comes time to collect SS or other benefits mentioned above, people who've worked for cash most of their lives find themselves in a very sorry position indeed.
cap says:
Tom; I believe I can answer your question, even though both DH and I are still living. If the spouse with the higher SS income passes first, the living partner will continue to draw their regular monthly amount, plus SS will add the difference of the 2 amounts , so the amount will be the amount of the high recipient. Now if the lower recipient passes first , the higher recipient will not receive a bump in income.
Editor comment: We agree, thanks Cap. One more reason to consider the decision for when (and which partner) collects SS. Having at least one person get the maximum benefit has long term implications.
Louise says:
JCarol, you are so right about working under the table! Our neighbor has a son who graduated high school 8 years ago and has been doing work for mostly cash as far as I know. I am sure he thinks he is beating the system not paying taxes. He probably has no idea about Social Security and most likely thinks everyone automatically gets a Social Security check at a certain age and that paying taxes on income has nothing to do with it.
I wish the schools would teach kids about real life subjects. I also never knew anything about Social Security when I was younger. The only thing I knew was some rule about working 10 years to get it. I didn't even know SS was based on 35 years of working till much later. Plus, people don't realize that SS is usually not enough to live on, and other savings are needed to have a decent retirement.
If the younger people were educated earlier in life, maybe they would understand the value of saving for retirement. Young people are busy with 'life'. Relationships, homes, children, divorce, putting kids thru college. It is tough, no doubt! We have all been there!
VTRetiree says:
Louise you're so right - schools need to teach 'life skills' to include managing money handling a checking acct., etc. I also am a firm believer that all male/female should have/learn basic home skill such as laundry, cooking, taking care of a home to include kids deemed going to college. All kids need to learn basic survival skills & not say 'these will be learned at home by parents.'
RichPB says:
VTRetiree, I completely agree with both of you. We leave it to parents who have little to no guidance and often little interest in doing it themselves so that the kids get dumped into a world where they have to make all the mistakes and stumble on with no practical foundation. It's easy to SAY that it's up to the parents, but frankly many don't have a clue themselves and pass on the same mistakes they made.
John Brady says:
The AARP has a comprehensive article on ways that Social Security can be fortified so benefit cuts don't happen in 2033 or 2034. Some are more aggressive than others, but most people agree something has to be done. If only congress would quit fighting, listen, and do something. See https://www.aarp.org/retirement/social-security/info-2022/benefits-current-status-future-stability.html