Avoid The $300,000 Retirement Mistake

Investing & Retiring, Retirement, Social Security

Could you afford to give away $300,000 in retirement? Very few of us could give up such a sum and retire comfortably – but according to one financial expert, you could leave that much on the table by choosing the wrong strategy to claim your Social Security benefits.

Ron Carson, a Certified Financial Planner and the Founder and CEO of Carson Wealth Management Group, claims that, over a lifetime, the difference between the best and worst options for anyone claiming Social Security could be as high as $300,000.

Given that elderly beneficiaries are heavily dependent on Social Security, the wrong choice could be catastrophic. According to the Social Security Administration (SSA), 71% of single elderly beneficiaries and 50% of elderly married couples receive more than half of their income from Social Security – and 43% of singles and 23% of couples receive 90% or more of their income from Social Security.

The rules can be complex, but there are a few general guidelines that can help you optimize your benefits in most circumstances. Start by making sure that your earnings record is accurately reported. Your Social Security earnings are calculated based on your top 35 years of earnings, adjusted for inflation. If one of your top earnings years is reported incorrectly or missing, your monthly benefits will be reduced accordingly.

By registering for a My Social Security account, you can check your earnings history and get estimates of your benefits. Contact the Social Security Administration to correct any errors that you may find. If you don’t have 35 years of significant salary, it’s important to replace the weaker years with higher-earnings years before you retire.

The next decision involves when to claim your benefits. To claim your full monthly Social Security benefits, you must wait until your full retirement age (FRA), which will be 67 for those born in 1960 and later. You may claim benefits as early as age 62, but your monthly benefits will be reduced proportionately. Conversely, by delaying your claim beyond your FRA, you can add an extra 8% to your benefits for each year of delay until age 70.

Whether or not you come out ahead by delaying benefits depends on how long you live. In essence, claiming early brings you smaller monthly benefits but more monthly checks. Consider two beneficiaries with the same birthday and same earnings history. If one claims at age 62 and another claims at age 70, the early claimant has a head start of eight years of monthly benefits towards their lifetime total. The later claimant will eventually catch up and surpass the lifetime benefits of the early claimant – but only if he or she lives long enough.

Are there other situations where claiming benefits early could be best for you? There are a few scenarios, but several loophole strategies for married couples such as “file and suspend” were recently closed through legislation. As a rule of thumb, the decision to file early should be mandated by lifestyle needs. Low earners and beneficiaries in poorer health and in greater need of funds may be best off filing early, while high earners, those with limited retirement savings, and healthier beneficiaries may be better off delaying benefits.

Spousal benefits are also a major consideration. Spousal benefits are calculated at 50% of your spouse’s Social Security benefits at full retirement age – but for lower-earning individuals with higher-earning spouses, the spousal benefit may be the best choice.

Are you planning to work beyond your FRA? Prior to your FRA, there are annual limits on how much you can earn without some reduction in your Social Security claims – but beyond age 70, the earnings limits no longer apply. There’s no economic reason to stop working if you want to continue and build up your nest egg even further.

These are just a few of the considerations in optimizing your Social Security benefits. As retirement approaches, research your options and pick the strategy that works best for your situation – but make sure that you keep up with any legislative changes that affect Social Security filing. A sound filing strategy is an essential part of providing you and your spouse with a comfortable retirement.

Let the free Retirement Planner by MoneyTips help you calculate when you can retire without jeopardizing your lifestyle.

Photo ©iStockphoto.com/KLH49

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