Knowledge of Social Security falls short

Many aging Americans don't know enough about important benefits

Retirement

November 30, 2008|By Humberto Cruz | Humberto Cruz,Chicago Tribune

It's one of the biggest, if not the biggest asset, for millions of Americans in or near retirement. Despite a global financial crisis, it has kept all its value.

But many people have little practical knowledge of this asset - assuming they even think about how to get the most out of it.

I am talking about Social Security retirement benefits, which by all rights should be a major component of any retirement income plan.

Consider: The average monthly Social Security retirement benefit, after a 5.8 percent cost-of-living increase, will be about $1,153 in 2009. To receive that much inflation-adjusted income for life, a 65-year-old man would have to pay an insurance company a lump-sum premium of about $204,000 for an immediate annuity, and a 65-year-old woman about $225,000, based on the lowest quotes I found from highly rated companies.

Is your individual retirement account or 401(k) worth that much? In addition, Social Security offers attractive spousal and survivor benefits.

Clearly, we should pay attention to the ins and outs of Social Security. The decision of when best to start collecting benefits - as early as 62 for reduced benefits to as late as 70 for enhanced benefits, or anywhere in between - can hinge on many factors.

Aside from any immediate need for money, these factors include how long you expect to live, your tax bracket, whether you're still working and whether you are single or married.

"Social Security-related decisions can be complex, and there can be trade-offs," said Carolyn Clancy, an executive from Fidelity Investments. A recent online survey commissioned by Fidelity shows that many Americans lack the basic knowledge to understand these trade-offs and make informed decisions.

A vast majority (85 percent) of the 300 61-year-olds surveyed did identify 62 as the earliest they can start collecting reduced benefits. But 56 percent didn't know when they would receive unreduced benefits if they waited to collect. The answer is 66 for anyone born between 1943 and 1954. After that, the age of eligibility rises by two months every year until it becomes 67 for those born in 1960 or later.

More than half didn't know people have to file for benefits three months before they want to start receiving them. Almost a third believed incorrectly that Social Security benefits are not taxed (up to 85 percent of benefits may be taxed depending on what other income we have).

Nearly three-quarters didn't know that a nonworking or lesser-earning spouse could be eligible for benefits based on the work record of the higher-earning spouse.

More than half didn't know that a surviving spouse could be eligible to receive the Social Security benefit of the deceased spouse if it was larger than the survivor's own benefit.

Also, 45 percent of the 61-year-olds say they plan to start taking benefits as soon as they are eligible at 62. The most common reason given was that they need the money.

Such an action would lower their benefits permanently. Among those planning to collect as soon as possible, 73 percent didn't have a retirement income plan. So perhaps there is another way to bridge the income gap until full retirement age that they didn't consider.

Also, just 22 percent said they knew exactly how much their benefits would be - and 26 percent had no idea. Yet Social Security has been mailing Americans an annual benefits estimate since 1997, and this year the agency introduced an improved benefits estimator at www.socialsecurity.gov/estimator.

E-mail Humberto Cruz at yourmoney@tribune.com.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.