By Michael D. Bird, CFP®, MBA
When a student starts out with “Someone told me…” I am usually amazed at what comes next. For the most part, it is usually incorrect. For example, many people think incorrectly that Social Security is based on the last few years of work. It’s not, but let’s look at some of the most common fallacies that have been mentioned. And not in any particular order.
Myth: Social Security benefits are calculated on the last 5 years of work. No, the actual formula for determining your benefit starts with a complete history of your work and the earnings for each year. The Social Security Administration (SSA) then takes the highest 35 years. The years are adjusted and then averaged. So, it’s important to check your earnings record and assure that there are no missing years when there should have been pay. Then SSA adjusts it some more to come up with the Primary Insurance Amount (PIA). The PIA is the full, unreduced amount that a person qualifies for at age 66 or 67, based on their birthdate.
Myth: Once Social Security benefits are calculated, they never go up again. Benefits are adjusted each year with a Cost of Living Adjustment (COLA). The annual COLA is based on an index published monthly and takes into account food and energy. If the prices of things go up, the benefits are adjusted. For 2018 the increase is 2.0%.
Myth: Social Security benefits can be maximized at age 65. The Full Retirement Age (FRA) used to be 65, but now benefits can be started at age 62 with the actual amount reduced by the number of months that the benefit is taken before FRA. For many, that is age 66 and so their benefit would be reduced 25%. However, starting for those born in 1955, the FRA increases by two months for every year. So, a 1955 baby has a FRA of 66 plus 2 months. 1956 is age 66 plus 4 months. And so on until those born in 1960 and later have a FRA of 67.
Myth: Since the Social Security Trust fund is declining, it’s better to file now. The big picture is that Social Security does need to be fixed. However, for many, many people, Social Security is their main, or only income (see www.ssa.gov). The first page of the Social Security benefits statement highlights the importance of fixing the system. SSA calculates that by 2034 the Trust Fund will run out of money and SSA will be forced to reduce benefits by 21% (see www.ssa.gov). That’s the worst case. Surely Congress can resolve this issue before then and eliminate the chance of anyone getting a reduction.
Myth: Since Social Security is our main retirement income, our investments should be guaranteed also. First, everyone is different and some can handle stock market fluctuations better than others. However, for those that can handle it, your investment strategy should not be determined by your age or your retirement status solely. Instead, keep in mind that at age 65, a couple has a good chance that one would still be alive at age 95. That’s 30 years the money needs to last, at least. If inflation were to jump to 4%, then the price of things would increase 3x what they are today. Said another way, it would take three times your income to be able to buy at 95 what you can buy at age 65. The moral of this story is that your money has to continue to grow, even in retirement. Of course, taking too much risk could wake you up in the middle of the night! So, it’s important to invest appropriately.
Myth: If my spouse dies I’ll get to keep both hers and my benefits. Unfortunately, that’s not the case. When one spouse passes away, the survivor gets to keep the larger check. Widows and widowers have some special options available to them, so it’s important to talk with an advisor that can answer your Social Security questions before deciding on a particular benefit. Even if you think it is very straightforward, it’s worth getting a second opinion.
Myth: My ex-husband can prevent me from collecting Social Security. In general, he cannot. Basically, once you’ve turned 62, you can file on his record as long as he is also at least 62. Some women are able to take the ex-spouse benefit at FRA, then switch over to her own benefit (which will have grown) at age 70 and receive a bigger check.
The amount of misinformation about Social Security is staggering, and unfortunately, the people that are hurt are retirees. If you have questions, or know someone approaching retirement, encourage them to talk with someone who knows how it works. Their retirement income could be the better for it.
Michael Bird, a Financial Advisor with Secure Money Masters in Bristol, TN, is also an adjunct Professor of Finance and has taught at several universities and colleges, including ETSU, Belhaven College and the University of Memphis. He currently teaches a course on Social Security and how to integrate Social Security benefits with Retirement Income.
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