One of the biggest Social Security mistakes I see people make is claim their benefits too early.
According to the Center for Retirement Research at Boston College, 60% of seniors are applying for social security benefits before full retirement age.
If you turned 62 last year, your full retirement age will be 66 years and six months. Full retirement age will continue to increase in two-month increments each year until it reaches 67.
Even though you’re eligible to start claiming benefits at 62, it’s ill-advised. Monthly payments are reduced by 25-30% if you claim at 62, depending on your birth year.
In theory, claiming Social Security benefits should be straightforward — after working several decades, fill out an application and get a monthly benefit check for the rest of your life.
But, you and I know it’s not that easy. There are strategies to consider if you want to maximize your benefits, and there are several mistakes that could cost you thousands of dollars over the course of your retirement if you’re not careful.
Here are just a few mistakes I see people make that could easily be avoided.
Mistake #1 – Claiming Benefits Too Early
I already explained why this is not advised for most retirees. But if you already chose to claim benefits early and now are second-guessing your decision, there are some recourse steps you can take.
Specifically, you are allowed to withdraw your Social Security application and re-claim benefits at a later date, but two conditions apply.
First, you must withdraw your application within the first 12 months of receiving benefits. And second, you have to pay back every cent of benefits you’ve already received. Which can be a lot of money if you weren’t planning on withdrawing.
This is why you should be certain. There are some perfectly good reasons for claiming benefits before your full retirement age, but it’s important to weigh all your options before you make moves.
Mistake #2 – Not Understanding the “Earnings Test”
If you’re still working and haven’t yet reached full retirement age, your benefits can be withheld based on your earnings.
Here are the two “earnings test” rules for 2019:
- If you will reach full retirement age after 2019, $1 of your benefits will be withheld for every $2 you earn in excess of $17,640.
- If you will reach full retirement age during 2019, $1 of your benefits will be withheld for every $3 you earn in excess of $45,920. This is prorated monthly, and only the months before your birthday month are counted.
To be clear, benefits withheld under the earnings test aren’t necessarily lost. They can be returned in the form of increased benefits once you reach full retirement age.
People who think they can be fully employed and collect their Social Security benefits are often caught off guard when the Social Security office tells them they made too much money and have to repay some of the benefits.
Once you reach full retirement age, you can earn as much as you’d like with no reduction in benefits.
Mistake #3 – Assuming Social Security Is All the Retirement Income You Need
23% of married couples age 65 and older and 43% of unmarried seniors rely on Social Security for 90% or more of their income. Not only is this unsustainable, it’s not how Social Security was designed. The original intent was that Social Security would account for about half of your retirement income.
In reality, the average American can expect Social Security to replace about 40% of their income. The rest needs to come from other sources, like pensions and retirement savings.
Typically you’ll need 70% to 80% of your pre-retirement income to maintain your quality of life after retiring.
Mistake #4 – Not Checking Your Social Security Earnings Record
Do you check your Social Security statement each year? If not, now is a good time to create an account at www.ssa.gov and check it out.
Your Social Security statement has lots of valuable information, including your estimated retirement benefits, disability benefit eligibility, Medicare eligibility and benefits for your potential survivors.
But maybe the most important reason to check your statement every year is to ensure it’s correct. Recently, the SSA said there was about $71 billion in Social Security-taxed wages that couldn’t be matched to any earnings records, and only half of this was eventually resolved.
Because your future benefits are based on your earnings record, it’s important to make sure you keep tabs on this number.
Mistake #5 – Remarrying without Understanding the Consequences
If you’re collecting an ex-spousal Social Security benefit and you remarry, that benefit goes away. And if you remarry someone who is 10 or 20 years younger than you, you might not qualify for spousal Social Security benefits for awhile.
So make sure you understand how remarrying will impact your benefits. Also consider, if your ex-spouse passes away, you will step up to their full benefit amount — not the most pleasant thing to think about but important to consider.
Mistake #6 – Assuming Social Security is Tax Free
A surprising number of people I’ve talked to don’t realize they may have to pay income tax on their Social Security benefits. It depends on how much retirement income you have. But you don’t have to be considered “high income” to be taxed.
If your combined income is greater than $25,000 for single filers or $32,000 for married couples filing jointly, as much as 50% of your benefits could be taxable. If your combined income is greater than $34,000 (single) or $44,000 (joint), as much as 85% of your benefits could be subject to federal income tax.
It really depends on how significant a source Social Security will be for your retirement income. If you have a pension and significant 401(k) income, likely a portion of your Social Security benefits will be taxed.
If Social Security is your prime source of retirement income, you’re unlikely to be taxed. Consider this when estimating how much income you’ll need in retirement.
To a richer life,
— Nilus Mattive
Editor, The Rich Life Roadmap