Around 44.5 million retired workers receive a monthly benefit check from the Social Security Administration. While the average benefit isn’t very big (just $1,503 per month in 2020), Social Security remains a very important source of income for most retirees. In fact, millions of seniors rely on their benefits to provide some — or even all — of their income.
Since chances are good your Social Security benefit will be an important source of retirement funds, you need to make sure you avoid errors that reduce your benefit. Here are four major mistakes that you can’t afford.
1. Not understanding how your benefit amount is calculated
The amount of your monthly Social Security check is affected by many factors, including when you claim your benefit as well as your work history. If you don’t know how your age at the time of filing affects the size of your check or if you quit work too early without putting in enough time on the job, you could permanently reduce the amount you receive each month.
Your Social Security benefit is based on your average wage in the 35 years you earned the most. So working fewer years than that can be costly since it would mean some years of $0 earnings substantially reducing your average wage. Quitting your job at the peak of your earning power, instead of getting some extra years of high earnings included in your average, could also be a costly mistake.
Choosing the wrong claiming age also affects the size of your monthly checks, although not necessarily your lifetime income. Those who file prior to full retirement age (which is between 66 and 67 depending on birth year) face a small early filing penalty that reduces their benefit for each month they’re early, while retirees who file after FRA get a small monthly increase in the size of their check by earning delayed retirement credits.
While theoretically these early filing penalties and delayed retirement credits are designed to ensure retirees get the same lifetime income regardless of when they start benefits, those who outlive their projected life span would get more total income by delaying their claim, while retirees who pass away early would get the most money by starting their checks as early as possible, at 62.
Although you can’t predict when you’ll die, you should make sure you know what factors affect the size of your checks so you can make an informed choice.
2. Claiming benefits before you’re actually ready
If you file for your benefit without making sure you’ve chosen a smart Social Security claiming strategy, you may have few options for undoing your mistake. While you could rescind your application if you started receiving checks fewer than 12 months from the time you enrolled, you’d have to pay back all you received. For most people, that’s not possible.
Think through different claiming options. You may even want to talk to a financial adviser if the whole process confuses you.
3. Failing to consider your spouse
When you’re married, your decisions on Social Security don’t just affect you, they can affect your spouse as well. This is particularly true if there was an earning disparity between you and your partner.
Your partner could claim benefits on your work history, but can only do so if you’ve already filed for your own benefit to begin first. When one partner dies, the other can also get survivors benefits, which would be reduced if the higher-earning spouse claims prior to full retirement age.
In many cases, it makes sense for the person who earned more to wait to claim in order to increase the amount of survivors benefits. You don’t want to leave your spouse struggling if you pass away first, so the goal should be to maximize the combined lifetime benefits you both receive.
4. Working without understanding how your income affects your benefit checks
Working and getting Social Security at the same time isn’t a problem if you’ve reached your full retirement age. But if you haven’t hit that milestone yet and you get a job, you could reduce your benefit if you earn too much. Social Security figures out the reduction in benefits based on earnings and withholds entire checks to account for it, rather than simply reducing your checks each month. This means you could end up with months of no benefits at all.
The money you miss out on eventually does come back to you as Social Security recalculates your benefit at your full retirement age. For each month you didn’t get a check due to earning too much, you aren’t subject to the early filing penalty.
Still, if you were counting on being able to work to supplement your Social Security before full retirement age, you may find yourself facing an income shortfall if you earn so much that your benefit checks are reduced or stop coming.
Make sure you avoid these big errors
These mistakes could affect the size of your benefit checks and make your retirement much less comfortable. While Social Security shouldn’t be your sole source of income in retirement, you do want to make sure you maximize your checks to enjoy your later years.
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