Nov 2, 2016 4 min read

Social Security remains the foundation of most people’s retirement. It is one of the few income sources that have a cost of living feature. Surprisingly, many people do not understand Social Security, and they make decisions that cost them large amounts of money over their lifetime.

Anyone born in 1954 or earlier must be 66 to reach full retirement age. This is the age when you receive 100 percent of your earned Social Security income. You can start receiving benefits at age 62; however, you will be penalized by 25 percent. This will last for the rest of your life. If you delay starting benefits until age 70, you will receive a bonus of 32 percent.

Let’s discuss a couple of situations that I came across recently that involved Social Security decisions. One woman had started receiving benefits about six month ago. At the time, she was 65 and six months. This means she was not full retirement age. Social Security says she is deeming. This is when someone before full retirement age files for benefits. This means they first consider her own work record. They reduce her benefit about three and a quarter percent for applying early. Then they consider if her benefit is more than half of her husband’s benefit which she could receive as a spousal benefit at full retirement age. Social Security uses all of this information to calculate her benefit.

She had a friend who worked for Social Security and they decided that she would apply. When reviewing her situation, we saw if she had waited six month until her birthday, she could have filed a restricted application for only her spousal which would have been only about $100 per month less than she is getting now. Why would you want to receive less? Because her own account would grow about 32 percent over the next four years. At age 70, she could switch to her own benefit. Doing this would mean it would take just over two years to break even if we considered the six months she would not receive plus the $100 per month.

There was good news, if you are in the first 12 months of receiving your benefit, you can pay back what you received and make a new choice. She decided to do this. There is always a question will you collect the higher benefit long enough to offset a period of time without one? This woman’s parents are both over 90 and doing great.

In another case, there was a woman who is a widow. She just reached age 60 which is the earliest you can receive benefit as a widow or widower. She wanted to know if she should file for benefits. Survivor benefits are treated differently than other benefits. Filing at age 60 does not reduce benefits based on your own work record. This means that she can apply for only survivor benefits now and wait to her full retirement age to begin her own. However, survivor benefits are subject to the earning test if you are not full retirement age. If she earns more than $15,720 in a year, she will have to pay back one dollar for every two above the limit.

Social Security income is important, but not well understood by many people. You definitely want to learn all that you can to make the best decisions for your family. In a couple of weeks, we will discuss some addition information about this subject.

Your Financial Future is written by certified financial planner Gary W. Boatman, MBA and CFP, who also wrote the book, “Your Financial Compass: Safe Passage Through The Turbulent Waters of Taxes, Income Planning and Market Volatility.”