The Most Expensive Mistake You Can Make Regarding Social Security
Social Security benefits are the foundation of most people’s retirement income plans. But the obscure ins and outs of the government program can be confusing to even the most financially literate Americans. Any error — big or small — can be costly. Most of us would regret leaving any money on the table when our futures are in question. To avoid such blunders, here are nine costly mistakes you’ll want to sidestep if you have any hopes of maximizing your Social Security checks moving forward.
9. Retiring at the same time as your spouse
- Married couples who don’t employ claiming strategies could lose money
It’s easy for couples to forgo claiming strategies while they’re busy dreaming up romantic retirement plans. But it’d be a mistake for married couples not to coordinate the timing of both available claims. Some couples may be inclined to grab both benefits simultaneously, but the better option would be to stagger them to avoid leaving money on the table. For instance, the higher-earning spouse could earn delayed retirement credits of 8% each year if they delay benefits until age 70. Meanwhile, the other spouse could take a spousal benefit for income security while the other benefits grow larger.
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8. Working less than 35 years
- Your work history affects your benefit amount
Those hoping to maximize their benefits must understand the caveats surrounding your earnings record. A common mistake many make with Social Security is miscalculating their top earning years. Benefits are calculated using your top 35 years of earnings, but if you have less than 35 years of employment, your records will indicate a big zero during unemployment gaps. Maybe you were at home raising children for a short time or you experienced job woes during the recession. Either way, these goose eggs will negatively impact your benefit.
What most people don’t realize is that the zeros can be replaced by a year of part-time work both during retirement and prior to it to help squeeze as much out of your benefit as possible. Working years don’t have to be consecutive either. If your preliminary benefits calculations show a lower amount than expected, consider ways to work a few more years to boost that payment higher, instead of accepting a lower payout for years to come.
Next: When you claim could be the difference between $900 or $1,200 per month.
7. Not understanding full retirement age
- Payouts can be deducted by 25% to 35% if you claim before your full retirement age
Most people think retirement begins at age 65, but adhering to that generality could cost you big time. With Social Security, full retirement age depends on the year you were born. Knowing where you fall on that scale determines how much you’ll receive once you claim. Full retirement age is actually 66 for those born between 1943 and 1954. That age rises by two months each year starting with the year 1955 to 1960.
If you claim at age 62 instead of 66, you could get slapped with a 25% to 35% reduction in monthly benefits. That’s a sizable cut, considering the average monthly benefit was about $1,261 in November 2017.
Next: Not all benefits are equal
6. Automatically claiming survivor benefits over your own
- Your only eligible for one benefit at a time
Widows and widowers are financially covered by the SSA’s survivor benefits program. This means you can claim a survivor benefit from your deceased spouse’s record worth 100% of the amount they were receiving at the time of their death. But before you get overly excited and cash in, remember you can only receive one benefit at a time. The government will not pay both retirement benefits and survivor benefits simultaneously, even if your situation does warrant it.
Consider how the survivor benefit compares to your own. For example, maybe claiming personal benefits early and delaying survivor benefits until you hit full retirement age results in a higher payout instead. It’s best to delay or claim the benefits that will yield the most money depending on your situation.
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5. Divorcing too soon
- Divorcing after only nine years will cost you spousal benefits
With the national divorce rate hovering around 40% to 50%, it’d be irresponsible not to consider the implications a separation would have on your Social Security benefits. In fact, divorces can help both spouses receive more money each month during retirement. But only couples who have been married for 10 or more years are eligible for an ex’s benefit. For example, both you and your spouse can restrict your application to spousal benefits only and delay your own until age 70 for a higher payout.
However, marriages that lasted just nine years and six months — or those who remarried later — are ineligible for these maximizing tactics. Check the numbers before filing for divorce. If future spousal benefits are significant, staying married a little longer could be worthwhile for both parties involved. Unfortunately.
Next: A hundred-dollar mistake
4. Claiming too early
- You could lose hundreds of dollars each month, depending on your benefit amount.
A large number of Americans choosing to claim early benefits suggests there’s an incentive to do so. But instant gratification isn’t always best when it comes to Social Security. Taking benefits before your full retirement age of 66 will result in a 25% smaller payout than those who wait. That’s a $375 cut on a $1,500 check. Those hoping for a larger monthly check may want to practice patience and hold off as long as they can.
Next: But waiting too long could be just as dangerous
3. Claiming too late
- Those in poor health leave money available when they file late
Sure, delaying your benefits earns you an extra 8% for every year you wait, but it’s not smart to hold off on benefits if you have known health issues. Putting off claiming Social Security is a strategy that could backfire if you don’t live long enough to surpass the break-even point on your benefits.
To be blunt, it’d be a mistake to postpone Social Security without first determining the age at which you come out ahead on your investment. Delaying claiming means fewer checks. If you think you’ll beat the average life expectancy, then waiting for a larger monthly check might be wise. But if you’re in poor health, or have reason to believe you won’t live to age 80 or 82, waiting to collect benefits makes little sense. You’ll have less time (fewer payments) to collect your lifetime benefits.
Next: A thousand-dollar mistake
2. Forgetting about taxes
- Taxes can easily amount to thousands of dollars each year.
Budgets are tight enough for those living on a restricted income, but forgetting to subtract Social Security taxes from your annual income could further impale your finances. If your combined income is greater than $32,000 (for joint filers) or $25,000 (for single filers), then up to 85% of your benefits are taxable. For example, The Balance suggests a married couple would pay nearly $4,400 in taxes if their combined income reached $55,000 annually.
Beneficiaries living in 13 states are also subject to a state tax on Social Security as well. Some proactive retirees withhold a percentage of their benefits to counteract this cut. If you are one of the many whose benefits will be taxed, you may want to consider this option to avoid paying a large bill each year.
Next: The most expensive mistake you can make with Social Security
1. Working too much during retirement
- Benefits will be reduced by $1 for every $2 you earn above the limit
Most would consider working while collecting Social Security the responsible thing to do. Unfortunately, workaholics risk serious penalty if their earnings surpass more than $17,040 per year (in 2018) while receiving Social Security benefits. Should you commit this atrocity, the SSA will withhold $1 for every $2 you earn over the limit. As Money Talks News explains, the monthly penalty on $60,000 in earnings in 2018 is a whopping $1,790 a month. The good news is that the penalty only applies to those who are under full retirement age. After you reach full retirement age, you can work an continue to get your full Social Security benefit.
Follow Lauren on Twitter @la_hamer.
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