Avoid These Three Common Mistakes When Claiming Social Security

Social Security benefits serve an essential role in most Americans’ retirement plans. Yet many people — even soon-to-be retirees — know little about how the program works or how to get the most from the benefits they’ve earned.

Determining when to start your Social Security payments is a major life decision — one that could mean the loss or gain of tens of thousands of dollars for you and your spouse over your lifetime.

The problem is, there are thousands of claiming rules, hundreds of claiming strategies and, most likely, plenty of personal factors that could come into play as you decide when to file for your benefits.

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So how can you get it right? A great way to start is to avoid these three common mistakes:

Mistake #1: Not Factoring in Your Life Expectancy

You can claim your Social Security benefits as early as age 62, and many people do. But if you expect to have a long retirement, you may want to delay filing for as long as you can, so you can receive the biggest payment possible.

Here’s why:

• To be eligible for 100% of your earned benefits, you must reach what the Social Security Administration (SSA) refers to as your “full retirement age (FRA),” which ranges from 66 to 67, depending on your birth year.
• If you start your benefit at the earliest age possible, 62, your benefit will be permanently reduced, by up to 30% of what it would be if you had waited until your FRA.
• Every year that you wait past age 62 to start receiving your benefit, you will receive more money. And if you can postpone filing until you’re past your FRA, you’ll get a delayed retirement credit of 8% for every year after that, until you turn 70.

If you live a long life, as many do, you might receive that higher benefit for 30 years or more, and an extra $1,000 or $5,000 per year in your pocket adds up. Perhaps a difference of over $100,000 in your lifetime.

On the other hand, if your health isn’t great, or if you come from a family with a history of health issues, it may be wise to file early and get the most from the benefits you worked so hard for.

You can get an idea of how much your payment might be at various ages by signing up for a My Social Security account at www.ssa.gov/myaccount. Or you can use the tools provided at www.ssa.gov/planners/calculators.

Mistake #2: Not Understanding Social Security Basics

Besides age, several other factors could affect your planning. They include:

• Marital status. If you’re married, you and your spouse should carefully coordinate when each of you will file for Social Security benefits. The choices you make now could have a big impact on your combined Social Security income — both when you’re together in retirement and, later on, if one of you is widowed. (People often forget that when one spouse dies, the lower Social Security payment disappears, and the surviving spouse keeps only the higher of the two benefits. So, any increase the higher-earner can get with smart claiming strategies will add to the surviving spouse’s security down the road.) Talk to your financial adviser about how Social Security's spousal and survivors benefits could affect you. If you’re divorced but were married for at least 10 years and haven’t remarried, these benefits may apply to you, as well.
• Working. You can keep working after you begin your benefits, but depending on your age, you may be subject to an annual earnings test. Here’s how it works: If you take your benefits before you reach your FRA, the SSA will deduct $1 for every $2 you earn above its annual earnings threshold. (In 2021, that limit is $18,960.) In the year you reach your FRA, the limit increases, and then goes away completely.
• Taxes. Originally Social Security was not to be taxed, but since 1984 it can be taxed for many people, up to 85%. The IRS measures your “provisional” (or combined) income each year to determine if you must pay taxes on your benefits. Depending on that income amount, you may have to pay taxes on up to 50%, or even 85%, of your benefits. Ask your adviser to suggest strategies to minimize your taxes in retirement, especially if you’ll be pulling a portion of your income from a 401(k) or similar tax-deferred retirement plan. (If your broker or financial planner isn’t talking to you about tax strategies, you may want to consider moving to a financial adviser with both tax experience and financial planning training.)
• Inflation. The SSA announces its cost-of-living adjustment (COLA) each year. The amount is usually in the 1% to 4% range, but sometimes there is no adjustment at all. Growing your Social Security benefit by delaying claiming — and having multiple income sources in retirement — could help you maintain your purchasing power.
• Do-overs. If you file for benefits, then change your mind, you can withdraw your application and reapply later. But it’s a one-time-only do-over, and you must withdraw within 12 months. Also, you’ll have to pay back any Social Security benefits you received.

Mistake #3: Not Coordinating Social Security with Other Assets

The key to Social Security planning is to treat it with the same level of respect you give your other assets.

After all, those monthly payments may be the most reliable income stream you have in retirement — and possibly the largest. For most retirees, their Social Security benefits will provide more than $500,000 during their lifetime. For some, it will provide more than $1 million.

Yet many soon-to-be retirees give much more thought and weight to investing — what the market will do next, and when and what they’ll buy and sell — than they do to Social Security decisions.

Of course, investing is a great way to build your nest egg. But for most Americans, retirement success depends on careful, comprehensive planning that optimizes every asset and income source. And that includes good old Social Security.

There’s plenty of help available if you want to educate yourself about Social Security benefits. You can get general information on the SSA website, www.ssa.gov, or by visiting your local Social Security office. And your financial adviser can walk you through some of the more complex rules and strategies specific to your situation.

Kim Franke-Folstad contributed to this article.