How to Navigate the Social Security Claiming Maze

This article was originally published in full on Tacoma’s The News Tribune on April 1, 2024. Gary Brooks has been a contributing author for the paper since 2008 and is also a Partner and Senior Wealth Advisor at Mission Wealth in Gig Harbor, WA. 

“Understanding the Complexities of Social Security Can Lead to Better Financial Outcomes in Retirement.”

For something that contributes to the financial security of nearly every retired American, Social Security has a concerning number of complications and misuses. With over 2,700 different rules governing Social Security claims, making the best decision for your financial future requires a nuanced understanding of the system.

Early Claiming: Risks and Consequences

Nearly two-thirds of all Social Security recipients file early and receive permanently reduced benefits compared to what they are due at their full retirement age (FRA) – which is based on birth year. Some people are in poor health or otherwise can’t work and need the income as soon as available (age 62). Others may have more financial security but can’t resist receiving lifetime income at the first opportunity, even if it comes with as much as a 30 percent reduction.

Accepting reduced income to start early is particularly problematic in the case of couples where the higher earner is the one starting early and is likely to die first, meaning that the surviving spouse will continue to receive lower income than could have been available.

Many people are not fully aware of their options or the impact of their choices. It would be wishful thinking to expect a Social Security representative to help determine which options may lead to higher income. Social Security representatives are not tasked with helping you determine the most beneficial start date. Their job is to process the claiming strategy that you request. Most claims are now submitted online with no interaction to review the chosen option.

When even experienced Social Security reps are not subject matter experts, it can be helpful to use the SSA’s website tools, programs like Open Social Security, Maximize My Social Security, or resources available from financial advisors, to better grasp the differences in income and the impact on a personal financial plan.

Visualizing Your Options: A Guide to Social Security Claiming Ages

These resources will help pre-retirees understand that the estimate of future benefits produced annually by the Social Security Administration (SSA) may be too high. For instance, if you are 62 and review the current estimate for your Social Security income at your full retirement age of 67, the estimate assumes that you will work at your recent annual income until age 67. If you retire now, rather than fill in the years between now and 67 with more income, the Social Security formula will put $0 in for income each year and your eventual income may turn out to be less than the current estimate.

Your Social Security income is based on your highest 35 years of earned income.

If you retire before your full retirement age, possibly during what may have been peak income years, those years are replaced with income from other years, likely when you were young and earning comparatively little.

• Age 62: Earliest claiming age, with a reduction of up to 30% in benefits.
• Full Retirement Age (FRA): Age 66-67, depending on birth year, with no reduction.
• Age 70: Maximum benefits accrue, with an estimated 8% increase per year after FRA.

When you receive your annual benefit estimates statement, in addition to reviewing the estimate of your future Social Security income, it may be beneficial to review your past reported income. The SSA acknowledges mistakes in income reporting on 7-to-8 percent of personal benefit statements. You can report errors, but only up to three years, three months, and 15 days in the past.

The Option to Rethink Your Decision with a Withdrawal

If you start Social Security income but realize you should have waited, you have 12 months to file a withdrawal application, pay back any income received, and return to earning deferral credits for a larger future payment. Deferral credits become more beneficial after your full retirement age and up to age 70 when maximized. You earn a higher income of 0.66 percent per month (8 percent per year) after FRA. These higher payments also then provide a larger base for future cost-of-living increases to be applied.

If you wait for higher payments, you will have to live to a breakeven point for your patience to have been worthwhile compared to accepting lower payments but starting at an earlier date. Generally, if you do not expect to live beyond about age 78½, then you may realize more income by starting as early as age 62. If you wait until age 70 to maximize payments, you must live to about age 82 to receive more total income than you would have had by starting early. Typically, this decision should be made in coordination with a spouse’s Social Security options, if applicable.

Watch Out for Fraud

Unfortunately, you also need to keep an eye out for fraud. Some people who are not currently receiving Social Security income have others claim their benefits and start the income without the intended recipient knowing that a fraudulent claim has been made on their record. Aside from personal monitoring, you can have the SSA use identify verification or add an e-services block on your accounts.

Seek Professional Guidance

Navigating the complexities of Social Security is no small feat. Consulting with a financial advisor can provide clarity and ensure that your claiming strategy aligns with your overall retirement goals. At Mission Wealth, our team of advisors is ready to help you understand and optimize your Social Security benefits as part of a comprehensive retirement plan.