April 3, 2012
Many people on the verge of retirement lack knowledge about how Social Security works. Most older workers can't identify basic information about the Social Security calculation, including how many years of earnings are factored into their payout and how much their payments will increase due to delayed claiming, according to a recent AARP and Knowledge Networks online survey of 2,053 people ages 52 to 70 who plan to claim Social Security within the next 15 years. Here is what most people in their 50s and 60s don't know about Social Security:
How many years of work are factored into the payout. Social Security benefits are calculated based on your 35 highest-paid years in the workforce, but only 7 percent of survey respondents knew this. Most older workers guessed that the five (30 percent) or 10 (21 percent) years in which they earned the highest salary would be used to calculate their benefit amount.
You can get more than 30 percent bigger payments by waiting to claim. Most people (89 percent) know that their monthly Social Security payments will be bigger if they wait until their full retirement age to sign up for benefits instead of claiming at age 62. But very few people can identify exactly how much more they'll receive. "One thing that they generally know is that if you delay your claiming decision even a year, you will get a boost in your benefit, but when you actually ask them how much, they have no sense of what that actual amount is," says Jean Setzfand, AARP vice president for financial security. Only about a quarter (or 29 percent) of the survey respondents were able to estimate the percentage increase within 10 percentage points of the actual increase. For the survey respondents who are between ages 52 and 70, the increase in payments for delaying claiming from 62 until full retirement age ranges from 30.5 percent to 41.2 percent. Most of the survey respondents underestimated the value of waiting to claim their Social Security benefits.
Your payments could increase by 8 percent annually after your full retirement age. The majority of older workers (62 percent) know that their monthly payments will increase even more if they delay claiming past their full retirement age. But only 34 percent of those surveyed were able to identify a percentage increase that was within 2 percentage points of the actual increase. For most people in the age group surveyed, Social Security checks will grow by 8 percent for each year of delayed claiming beyond their full retirement age, up until age 70. Most of the survey respondents overestimated the benefit of delaying claiming after their full retirement age. "If you expect to live well beyond 80, you will maximize your benefit by claiming at 70. If you expect to die at three or more years before 80, then you will maximize your benefit by claiming at age 62," says William Reichenstein, a Baylor University professor and principal of Social Security Solutions. "You get two-thirds of 1 percent more for each month of delay. You could get 32 percent more by waiting until 70."
The age you can receive the highest possible monthly benefit. Social Security payouts grow for each year of delayed claiming up until age 70. After age 70, there is no additional benefit to waiting to sign up. But only 29 percent of those surveyed were able to identify age 70 as the year they would max out their benefit. Many people (41 percent) incorrectly guessed that it was between ages 65 and 67.
How the earnings test works. People who work and claim Social Security benefits at the same time before their full retirement age may see a temporary reduction in their Social Security payments if they earn too much. The earnings limit is $14,640 in 2012 for people below their full retirement age, above which 50 cents of each dollar earned is deducted from Social Security payments. For beneficiaries who will turn 66 in 2012, the earnings limit is $38,880, after which 33 cents of each dollar is withheld. While most older workers (76 percent) are aware of the earnings test, 71 percent incorrectly believe the reduction in benefits is permanent. Once you reach full retirement age, your checks will be recalculated to factor in any withheld benefit and your continued work record. "Most people who work before full retirement age are going to lose much, if not all, of the benefit, but there is an adjustment later," says Reichenstein. "When they hit full retirement age, they raise the benefit amount." And once you turn your retirement age, there is no penalty for working and collecting retirement benefits at the same time.
Spouses can claim benefits. Only about half (48 percent) of those who are married or who have ever been married are aware that they're eligible for Social Security spousal benefits. Spousal payments can be worth as much as 50 percent of the higher earner's Social Security payment. Dual-earner couples who have reached their full retirement age can even claim Social Security twice by signing up for spousal payments, then later switching to payments based on their own work record. "If both members of the couple wait until the full retirement age of 66, then either one of the spouses could begin receiving a spousal benefit based on the other spouse's record, and then continue to delay their benefit up until age 70, which would then maximize both of their benefits," says Jim Blankenship, a certified financial planner for Blankenship Financial Planning in New Berlin, Ill., and author of A Social Security Owner's Manual.
How to maximize widow and widower's benefits. Almost all older workers (95 percent) know that widows and widowers can collect Social Security benefits based on the earning record of the deceased spouse. Most people (78 percent) also correctly report that the age the deceased spouse signed up for benefits affects how much the surviving spouse will get. But only 52 percent of respondents correctly reported that the age the surviving spouse claims benefits can also affect how much he or she will be paid. To receive the maximum widow or widower's benefit, the surviving spouse must claim no earlier than his or her full retirement age. "Typically, the higher-earning spouse is the husband. The later that he waits to [receive] benefits, the higher the survivor's benefit will be at his demise," says Blankenship. "If he began receiving benefits early, at age 62, that would permanently reduce the amount that his wife could receive as a spousal benefit and the survivor's benefit she could receive upon his passing."