As today (Aug. 14) marks the 88th anniversary of our national Social Security system, we can revel in the fact that millions of Americans have been afforded financial protection in their retirement years. Unfortunately, that level of protection has waned due to several factors, including longer average life spans, a shift in the balance of contributions and the withdrawing benefits of the Social Security system.
Ideally, Social Security benefits serve as one of several retirement sources, alongside employer-sponsored retirement plans such as 401(k)s and personal accounts such as IRAs. However, it serves as the primary (and some cases only) income source for many retirees. Specifically, according to the National Academy of Social Insurance (NASI):
- Over eight in 10 Americans age 65 and older receive Social Security.
- For over three out of five (61%) of those beneficiaries, Social Security is more than half their total income, and for one in three (33%), it is all or nearly all of their income.
Since so many people rely so heavily on Social Security, it’s imperative to make the most of this income. With that in mind, here are three mistakes to avoid when claiming your benefits:
Mistake #1: Claiming too soon
The most common mistake is claiming your benefit too soon, or collecting your monthly benefit at a rate that’s lower than you would be entitled to receive had you waited until a future date.
Reasons for committing this misstep range from a combination of being unfamiliar with the various benefit options available, blindly following when others in your circle have claimed their benefits and succumbing to the widespread but misguided fear that “Social Security will go bankrupt soon.”
To avoid falling prey to this mistake, first find out what Social Security benefits you can expect.
For anyone born in 1943 or later, your full retirement age, as defined by the Social Security Administration, is between age 66 and 67, based on your birth year. If you’re contemplating retiring before that, it’s important to know that the Social Security program has been orchestrated to incentivize beneficiaries to delay claiming benefits. Specifically:
- If you start taking benefits at age 62, your retirement benefit will shrink by 25% to 30%, depending on your birth year. That’s because your lifetime annual benefits are decreased by about 8% for each year prior to your full retirement age you start to claim them.
- Conversely, your lifetime annual benefits increase by the same 8% for each year past your full retirement year if you delay claiming them — until the month in which you turn age 70, at which time your benefit has grown as large as it can.
The Social Security Administration has created an easy-to-use tool for calculating your reduced estimated annual benefits if you choose to begin claiming your benefits before you reach your full retirement age. Using this table, you can also view what you’d gain percentage-wise by postponing retirement.
Mistake #2: Forgetting about taxes
Another common mistake is failing to recognize that Social Security benefits may be taxable. The portion of benefits that are taxable depends on your annual income and tax filing status.
As explained on the IRS website, to determine if your Social Security benefits are taxable, you should add half of the Social Security money you’ve collected during the year to your other income. Other income includes pensions, wages, interest, dividends and capital gains.
- If you are single and that total comes to more than $25,000, then part of your Social Security benefits may be taxable.
- If you are married filing jointly, you should take half of your Social Security, plus half of your spouse's Social Security, and add that to all your combined income. If that total is more than $32,000, then part of your Social Security may be taxable.
Fifty percent of your benefits may be taxable if you are:
- Filing single, head of household or a qualifying widow or widower with $25,000 to $34,000 in income.
- Married filing separately and you lived apart from your spouse for all of 2021 with $25,000 to $34,000 income.
- Married filing jointly with $32,000 to $44,000 in income.
Up to 85% of your benefits may be taxable if you are:
- Filing single, head of household or a qualifying widow or widower with more than $34,000 in income.
- Married filing jointly with more than $44,000 in income.
- Married filing separately and you lived apart from your spouse for all of 2022 with more than $34,000 in income.
- Married filing separately and you lived with your spouse at any time during 2022.
Mistake #3: Not realizing that benefits increase over time
A third and final often seen misconception is not realizing that your benefit amount will increase over time. A cost-of-living adjustment (COLA) is made to Social Security benefits over time to counteract the effects of rising prices in the economy, aka inflation.
For 2023, the COLA is 8.7%, meaning for someone who received $10,000 in Social Security benefits in 2022, their 2023 annual benefit would total $10,870. While the 2024 COLA won’t be announced until later this year, if current year-to-date trends hold, next year’s COLA should be lower than this year’s, as inflation has gradually cooled this year so far.
The ever-fluctuating nature of Social Security benefit payments (and thus your household income) underpins the importance of creating and sticking with a spending budget to help ensure a comfortable retirement. If you are approaching your retirement years, these are important factors to consider now, as they might impact when you take Social Security.
There are thankfully ways to avoid these mistakes. First would be to visit the Social Security Administration website to learn more about Social Security. There’s a wealth of information, and it can also be used to sign up for Medicare.
You should also consider speaking with an accountant or Certified Financial Planner for determining when to claim, given your own personal circumstances, namely your income and expenses both present and in the future. This is too important of a decision to make on your own.
Remember that Social Security is meant to provide additional financial support so you can live your retirement years comfortably. With some thoughtful planning and assistance from the aforementioned professionals, such a life for you is very much achievable.
Vincent Birardi is based in Halbert Hargrove’s Long Beach headquarters and brings more than 20 years of experience in financial services to his wealth advisory relationships with clients — along with a passion for identifying solutions that will enable them to fulfill their life goals. What he values most about his role is helping to bring clarity and peace of mind to clients and their families. Prior to joining the firm in 2018, Vincent held management roles with PIMCO and Morgan Stanley. He was awarded the ACCREDITED INVESTMENT FIDUCIARY™ designation by the University of Pittsburgh-affiliated Center for Fiduciary Studies and is a CERTIFIED FINANCIAL PLANNER™ professional.
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