As I've written previously, I'm not counting on any payout from Social Security when I retire. By the time I'm ready to retire, I think it either won't be around, won't pay much, or will raise the retirement age well past the time I'd get anything from it. However, if you're retiring anytime in the next handful of years, you will be getting something and should plan accordingly to make the most of your Social Security payout. I've suggested before that there's a best age to start Social Security (the later the better), but there's so much more than that to be considered.
Author James Mahaney recently emailed me a piece he co-wrote titled Innovative Strategies to Help Maximize Social Security Benefits. Part of this document lists the five costliest mistakes retirees make about Social Security. Here's the list and my comments on each point:
1. Underestimating the real value of Social Security. Key quote: "Some never take charge of this benefit [Social Security] because the discount the viability of the system in general. But whatever your personal beliefs are about the Social Security reform debate or a 'pay-as-you-go system', most new retirees have been paying into the Social Security system for many more years than they have contributed to their Defined Contribution plan. They can count on both as critical sources of retirement income."
Hey, is he talkin' to me? ;-)
I'm not going to ignore Social Security when I get to the age to "manage" it, I just have a hard time believing that it will be worth much in 25 years. I guess we'll see.
2. Rushing to collect, then regretting the reduced benefits for the rest of your life. Key quote: "And most [retirees] certainly didn't stop to think that they could potentially double their initial payments if they only waited until age 70."
I'm planning to wait as long as possible before drawing whatever Social Security has for me -- that's one advantage of not counting on it for anything (and saving myself accordingly).
3. Not understanding how one spouse's decisions affect the other one's benefits. Key quote: "In essence, the value of delaying Social Security 'lives on' as the higher benefit is passed on at death to a spouse. This is a wonderful way to protect a spouse from running out of money."
Good information here -- I never knew this. If you're close to retirement, you HAVE to read this piece.
4. Getting blind-sided by the "Tax Torpedo". Key quote: "The tax situation for the retiree is often worse than expected. Once a very low income threshold is met, every dollar received from an IRA causes up to 85% of a Social Security dollar to become taxed too."
Yikes! I had (mistakenly) thought that taxes would be much more of a non-issue in retirement. Guess again, huh?
5. Assuming that more control equates to more income. Key quote: "The inability to delay 'ownership' of their Social Security benefits may cost many retirees dearly."
Another great point -- and one that shouldn't be missed.
As you can probably tell by now, I highly recommend Innovative Strategies to Help Maximize Social Security Benefits for anyone that's close to retirement or even if you're simply interested in knowing more about Social Security and "best practices" for managing it for yourself or for someone you love.
Social Security will still offer 75% after it "goes broke". This will decline over time to ~69% where it will be in balance with inflows and still offer a better standard of living than that of today. It is very real.
A 5% return is reasonable, but not sufficient for me to delay taking it. I should be able to do better. The tax situation is a much stronger reason. It may be much better to draw down retirement accounts before taking it, but then again if you will be paying it anyway, minimizing income over your lifespan may be better. You should have some saving outside of them to reduce your draw on them.
Posted by: Lord | August 29, 2006 at 02:49 PM