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Maximize Benefits by Avoiding the Top 3 Social Security Mistakes

Are you in danger of committing the top three Social Security mistakes? Do you even know what the top three Social Security mistakes are? If you don’t, you’re not alone. With 10,000 boomers turning 65 every day, millions of people each year are coming to grips with the intricacies of Social Security – and many of them will commit one or more of the top three Social Security mistakes as they make their plans.

But you don’t have to be one of them. As proof, we offer this recent Kiplinger article in which California financial planner Vincent Birardi presents what he says are the top three Social Security mistakes. We’ll take a look and see if he’s right.  And by the way, it’s appropriate that we take up this topic: just a few weeks ago, Social Security celebrated the program’s 88th birthday. Let’s hope our friends in Congress do their work so the program will be intact in another 88 years!

Social Security Mistakes Can Slash Benefits

Birardi writes, “As Social Security commemorates its 88th year, here are a few things to keep in mind when you start thinking about claiming benefits.”  First, he states, the very longevity of the program is cause for celebration: after 88 years, “we can revel in the fact that millions of Americans have been afforded financial protection in their retirement years.”

But there are storm clouds on the horizon. “Unfortunately,” says Birardi, “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.” All that makes it essential to avoid mistakes that can cost you money.

Social Security Mistakes Can Affect 80% of Seniors

Birardi reminds us that Social Security was never intended to pay for all – or even most – of retirement. “Ideally, Social Security benefits serve as one of several retirement sources,” he states, “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.”

To prove his point, he quotes stats from the National Academy of Social Insurance (NASI) that put the over-reliance on Social Security into stark perspective. According to NASI:

  • Over eight in 10 Americans age 65 and older receive Social Security.
  • For over three out of five (61 percent) of those beneficiaries, Social Security is more than half their total income, and for one in three (33 percent), 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,” Birardi observes. Here’s his list of the three big mistakes to avoid when claiming your benefits.

Social Security Mistake #1: Claiming Too Soon

“The most common mistake is claiming your benefit too soon,” Birardi argues, “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.” (We wrote about this concept here on the Blog just recently.)

Why do people fall into the trap of grabbing benefits too soon? It’s really human nature. “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.’” Birardi writes. Many would rather have a little cash now than a bigger benefit later.

This is one case, says the article, where knowledge is power. “To avoid falling prey to this mistake, first find out what Social Security benefits you can expect,” says Birardi. The place to start is with your “full retirement age,” sometimes abbreviated FRA.

“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,” the article advises. “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.”  

In practical terms, because your lifetime annual benefits are decreased by about 8 percent for each year prior to your full retirement age you start to claim them, you “lose” 8 percent for each year between age 62 (the earliest claiming year allowed) and your FRA. This reduces your monthly payment by as much as 30-40 percent. But the opposite is also true, says Birardi: “your lifetime annual benefits increase by the same 8 percent 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.”

Online tools can help you with these calculations. “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,” says the article. “Using this table, you can also view what you’d gain percentage-wise by postponing retirement.”

Social Security Mistake #2: Forgetting About Taxes

Social Security benefits are tax-free, right? Wrong. Failing to recognize that Social Security benefits may be taxable is mistake #2, and it can be an expensive one if you base your retirement budget on pre-tax assumptions. But the portion of benefits that are taxable varies depending on annual income and tax filing status.

We don’t have space to go into detail, but tax rates are explained here on the IRS website.  Bottom line: if your income plus half your Social Security benefit exceeds $25,000 for singles and $32,000 for couples, then part of your Social Security may be taxable. The taxable percentage of benefits rises with income. Most taxpayers will find that 50 to 85 percent of Social Security benefits will be subject to taxation at the rate determined by your tax bracket.

Social Security Mistake #3: Forgetting COLA

If taxes are the downside of Social Security benefits, the annual cost-of-living adjustment – COLA – is the upside. Unlike many retirement accounts and pensions, Social Security is indexed to inflation. Overlooking the fact that your benefit amount will increase over time is the third Social Security mistake cited by Birardi in his article.

“For 2023, the COLA was 8.7 percent,” he writes, “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, based on current inflation rates, the figure will be significantly lower than this year’s, probably in the 3 percent range.

“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,” Birardi advises. “If you are approaching your retirement years, these are important factors to consider now, as they might impact when you take Social Security.”

We would add that this is also a great reason to have a financial dashboard in place as Rajiv so often advises. Contact us and we’ll recommend a qualified, objective planner who will advise you about Social Security and all other aspects of proactive financial preparation.

“Remember,” Birardi concludes, “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.”

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(originally reported at www.kiplinger.com)

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