By Peter Mastrantuono
Albert Einstein once observed that everything should be made as simple as possible, but not too simple. The complexity of Social Security suggests that Einstein’s advice went unheeded.
To illustrate just how complicated Social Security is, Social Security has over 2,700 rules and in the period February-April 2021 alone there were over 100 rule changes made.
To be fair, much of the complexity is a result of attempting to meet the needs and personal circumstance of millions of Americans. It is no simple matter to account for marriage, divorce, remarriage, children, disability, different retirement ages, etc.
Amid this complexity is the average individual, who nearing retirement, must make critically important decisions that very often have lifetime consequences and cannot be reversed.
Unsurprisingly, many Americans are not receiving the full benefits to which they are entitled because they do not understand the financial implications of the decisions they make or are unaware of the rules that may help them obtain or increase their benefits.
According to a study by Capital One, current retirees will collectively lose about $2.1 trillion in wealth because they made a sub-optimal decision with regard to when they commence taking Social Security; in fact, just 4% of retirees make the most financially advantageous choice.
Americans may also lose benefits because they simply don’t know the rules, or know enough to ask the right questions. Consider this simple example.
A 63-year-old woman is married for eight months—one month less than the minimum nine months required to qualify for a widow’s benefit—when her spouse dies of a heart attack. She understands that there is an “accident” exception that waives this period, but she doesn’t believe she qualifies since her husband died of a heart attack while mowing the lawn.
But a close reading of Rule GN 00305.105 regarding accidental death includes a definition that refers to “external means” as a qualifying cause of accidental death. In this instance mowing the lawn is an external means that led to the heart attack that ended his life. It’s obscure but it may have a significant impact on the financial security of the surviving widow. (Note: A further nuance is that a widow/widower can collect survivor benefits starting at age 60—age 50 if disabled—though benefit payments may be reduced.)
While a surviving spouse may only need to have been married for nine months to qualify for survivor’s benefits, a divorced person needs to have been married at least ten years in order to qualify for the ex-spouse’s spousal benefit. Alas, not so simple…The divorced couple must be divorced for a minimum of two years and payments may not begin until the ex-spouse attains age 62, though payments based on an ex-spouse’s record can be made even if the ex-spouse has not begun receiving benefits.
Did you know that the strategy for maximizing Social Security for married couples is different depending on whether one of the spouses was born before or after January 2, 1954?
An earlier posting discussed some of the secrets of Social Security planning, but it really takes working with a knowledgeable financial advisor to help you navigate the complexities of the system and make sure that your decisions maximize your benefit payments.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.