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September 27, 2017 at 12:00 AM
Social Security is complex, to say the least. Between filing ages, spousal benefits and complications caused by earned income and pensions, many seniors feel they’re in over their heads.
“It’s a very much a self-help system,” says Rob Arthur, First Vice President of the Federal Benefits Consulting Team at Wells Fargo Advisors. “There’s no official who will tell you there’s a better way to do things, and retirees are left to take it all on themselves.”
Given the system’s complexities, several myths and misconceptions have become common – many of which lead retirees to make ill-advised filing decisions. For instance, why should a client delay collection if they don’t understand how much their benefits will increase, or if they believe the system will be insolvent within a decade? Likewise, why would an early collector go back to work if they believe they’ll permanently forfeit some of their benefits?
Fortunately, these misunderstandings provide advisors with ample opportunities to educate, earn trust and gain referrals. If you can clear up the following myths among your clients, you’ll only further your position as a trusted advisor. Plus, more Social Security income means more money left in the portfolios to invest.
Myth: You get back what you put in
Early filers often say that because they’ve been paying into the system for decades, they want to finally “get back” what they’ve put in.
“Some people think, for some reason, there’s an account set aside for them,” says Ash Ahluwalia of Atlas Advisory Group. Benefits are actually based on beneficiaries’ best 35 inflation-adjusted years of work, and they’re paid for with current payroll taxes, bonds and bond interest.
“In nominal dollars, you’ll actually get most of your money back within a few years,” Ahluwalia adds.
Aside from filing too early, this fallacy leads some seniors to work longer than they need to. A few more years at a peak salary may boost the average a bit, but it won’t have nearly the impact of simply working long enough to eliminate any zeros. For someone who’s already earned enough to get the maximum primary insurance (PIA) amount of $2,687 per month, it won’t have any effect at all.
Myth: You’re only entitled to your own retirement benefits
Single-income couples should know: Stay-at-home spouses are entitled to benefits. Even a spouse with no earnings record can receive up to 50 percent of the breadwinner’s benefit, although penalties are a little steeper for collecting early. Now that File and Suspend has come to an end, however, the primary beneficiary must be collecting their own benefits before their spouse can piggyback.
If the breadwinner dies, survivor benefits entitle the widow or widower to 100 percent of the deceased’s benefit. Plus, when a spouse dies before collection age, their survivors are still entitled to full benefits at full retirement age and reduced benefits as early as 60.
The SSA will automatically assign spousal benefits, but the beneficiary has to actually collect in the first place – something not all clients know. Also, assuming the breadwinner is filing later than 62, their spouse can (and probably should) draw their own benefit in the meantime. “They may not be eligible for the spousal benefit because the spouse isn’t drawing yet, but they can be transitioned in the future,” says Arthur.
Myth: If you work, you’ll forfeit your benefits
For clients who work while collecting at the full retirement age (FRA) or later, no amount of earned income will impact their benefits. For early collectors, there is an earnings limit — $16,920 in 2017. One dollar is deducted for every $2 earned over that limit, and the total deduction is taken in a lump sum from the next year’s checks.
That benefit isn’t lost forever, however. Once the worker reaches FRA, monthly benefits will be increased to pay back the deducted amount; the total deduction is usually paid back within 15 years.
Early collectors who work, in fact, may realize a twofold benefit later on: They’ll receive the deductions later in life, when they need them more, and any income earned before FRA still contributes to their earnings record, potentially boosting their monthly checks. “If you do collect before your full retirement age, you’ll be better off at FRA for working,” says Barry S. Waronker, JD, Senior Partner and CEO of Informed Family Financial Services.
Myth: Pensioners don’t get Social Security
Private pensions, for clients fortunate enough to receive them, won’t impact Social Security benefits a bit. Employers provide them at an additional cost, and they and their employees still pay Social Security taxes.
Matters are more complicated for public sector workers. The Windfall Elimination Provision reduces benefits based on the number of years a pensioner still paid into Social Security; the more years, the lower the reduction. With some exceptions, the Government Pension Offset also reduces spousal benefits by two-thirds of the pension amount.
