Part of the Political Issues and Policies Special Report
Fidelity Investments recently released a survey about when Americans say they plan to start claiming Social Security and how much they know about the basics of Social Security. As someone who specializes in writing about how the Social Security system works — or doesn’t work — I’d like to offer my take on the survey’s results. (These are my personal views and do not necessarily reflect the views of Next Avenue.)
Fewer Plan to Claim Social Security as Early as Possible
Fidelity’s big finding is that significantly fewer pre-retirees expect to take Social Security retirement benefits as soon as they’re allowed to by law — age 62— compared to when Fidelity conducted a similar survey in 2008. This year, just 28 percent of those aged 61 plan to claim Social Security at 62, down sharply from 45 percent in 2008. And 21 percent of those aged 55 to 61 said they’d collect the benefits as soon as they become eligible; in 2008, 27 percent said so.
Fidelity surmises the attitudinal shift is due to an “improving economic environment” and an increase in the percentage of survey respondents believing that delaying benefits “offers a better return than simply claiming Social Security as soon as possible and investing.”
Although 67 percent of pre-retirees were confident they understand Social Security rules, Fidelity said 'many possessed significant knowledge gaps.'
Most Don’t Know What They’ll Get From Social Security
Fidelity also reports that the vast majority of pre-retirees have little or no idea how much they will receive from Social Security, based on its survey. Only 14 percent of respondents said they knew the amount and 26 percent had no idea.
In addition, Fidelity asked four questions about Social Security’s rules.
Although 67 percent of pre-retirees said they were confident they understand the Social Security rules, Fidelity said “many possessed significant knowledge gaps” that could result in “costly misunderstandings when the day comes to retire.”
I actually think the questions and their supposedly correct answers may tell us more about Fidelity’s Social Security knowledge gap.
The Social Security Knowledge Gaps
Fidelity’s press release about the survey said:
There are no do-overs. Thirty-eight percent of pre-retirees thought it was possible to change one’s Social Security claiming strategy throughout retirement — in other words, to claim early at 62 and then, when they reach 66 or older, have their payments increased to the amount corresponding to their Full Retirement Age (FRA) benefits. In fact, there is no income “bumping” once one has claimed one’s Social Security retirement benefits — and the decision cannot be altered.
However, if the question is “Is it possible to change one’s claiming strategy throughout retirement?” the answer is actually Yes, not No.
If you take your Social Security retirement benefit early, you can suspend it at your Full Retirement Age (now between age 66 and 67, depending on when you were born) and then restart it at 70. Or, you can start your Social Security retirement benefit after your Full Retirement Age, suspend it before age 70 and then restart it at or before 70. The bumping, called Delayed Retirement Credits, increases your benefit 8/12 percent per month for each month your retirement benefit is in suspension.
Take someone who just turned 62 and whose full retirement benefit is $2,000 per month. If he takes his retirement benefit immediately, it will be $1,483 per month. When he reaches Full Retirement Age, which would be 66 and 2 months for him, he can suspend his benefit and restart it at 70. The restarted benefit will then equal $1,938 per month — that’s a 31 percent bump!
The Rules on Notifying Social Security About Claiming Benefits
Fidelity also asked a question about “advance notice.” The financial services firm asked survey respondents whether, according to the rules, they needed to apply for Social Security three months before the first payment. Sixty percent didn’t know that they did need to do this, including 9 percent who incorrectly believed the Social Security Administration will contact them when it’s time to receive benefits.
Well, Fidelity, that part about needing to notify Social Security exactly three months early to get your benefits on time ain’t necessarily so. You can talk to Social Security even sooner — or even a month before — and may still get your first check when you expect it.
Also, if you are older than Full Retirement Age, you can receive Social Security benefits retroactive to the earlier of when you received FRA or six months. For example, if you file for your retirement benefit four months beyond that age, but want them to start retroactive to your reaching your Full Retirement Age, Social Security will send you a check for those four months of benefits.
Few Know Their Full Retirement Age for Social Security
Fidelity’s third knowledge-gap question dealt with the Full Retirement Age rules. Interesting, Fidelity reported that only 26 percent of respondents knew their Full Retirement Age. The survey press release then states: This is a concern because one’s Social Security benefits are calculated assuming one will claim at FRA, which is determined by the year you were born.
Not the case. Social Security benefits are calculated with reference to your Full Retirement Age benefit. But they aren’t calculated assuming you will claim at FRA.
The Social Security Rules About Divorce and Benefits
Fidelity’s last knowledge-gap question concerned Social Security benefits and divorced people. Here’s what Fidelity said:
Your ex is entitled. Fifty percent thought their Social Security benefits could be reduced if an ex-husband/wife made a claim. The fact is, those who were married for 10 consecutive years and haven’t remarried are entitled to either their own benefits or 50 percent of the former spouse’s benefits, whichever is higher — once FRA is reached. Best of all, there’s no need to discuss this with an ex-spouse and the claim does not reduce or affect your ex’s benefits in any way.
Each of these sentences suggests a mistake in Fidelity’s — not the public’s — Social Security knowledge.
Here’s the reality: If your ex-spouse to whom you were married 10 or more years takes his or her retirement benefit early, that can materially lower your benefit when your ex dies. You can still collect on a dead ex even if you are remarried, provided you tie the knot after age 60. You can even keep collecting on a living ex if you remarry early, provided your new spouse is collecting on a living or dead ex.
And if you were 62 before January 2, 2016, you can collect just your divorced spousal benefit between FRA and age 70 if your ex is: at least 62 and you’ve either been divorced at least two years or your ex has filed for a Social Security retirement benefit.
Finally, you should discuss your plans for claiming Social Security with your ex since it may affect your divorced widow(er) benefit.
Using a Social Security Calculator
Fidelity’s press release also, not surprisingly, mentions its free five-question Social Security Benefits Calculator. But providing appropriate Social Security advice is impossible based on just five questions, without knowing such things as a user’s or spouse’s or former spouse’s precise earnings record and a former spouse’s age.
Full disclosure: I’m partial. My company markets a $40 detailed Social Security calculator at Maximizemysocialsecurity.com. But we don’t give people quick advice or sell financial products. I believe the use of quick advice (the bait) and immediate promotion of products (the switch) is one of Wall Street’s longstanding worst practices.
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