Yahoo Finance Avoid These Social Security Mistakes: How One Couple Lost $3,346 per Month in Benefits
Claiming Social Security benefits isn’t a black-and-white issue. For one, not everyone gets the same amount. And even your retirement benefits aren’t set in stone.
While Social Security retirement benefits are calculated based on your highest 35 years of earnings, other factors, like the age at which you apply for benefits and your spouse’s or former spouse’s benefit amount, can also affect what you ultimately receive. If you’re not careful, you could miss out on maximizing your benefits.
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Before applying for Social Security benefits, consider these potential mistakes:
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1. Claiming Too Early
You can start receiving Social Security retirement benefits once you reach age 62, but that doesn’t mean you should claim right away.
If you wait until your full retirement age — 67 for those born in 1960 or later — you can get the full retirement benefit that you qualify for, whereas claiming earlier would reduce that amount. And if you wait to claim until after your full retirement age, you get an 8% increase for each year you delay collecting, up to age 70.
That higher monthly benefit amount can add up to hundreds of thousands of dollars throughout your retirement.
“One same-aged couple we worked with five years ago claimed Social Security at age 62, which locked in a monthly benefit of $2,209 each or $4,418 together. But as the COVID crisis unfolded and inflation spiked, they found that amount of money was not keeping up and wanted to know what they could do to increase their benefit,” explained Chris Orestis, president of Retirement Genius.
“Unfortunately for them, once they claimed that benefit they locked in that level for the rest of their lives, and the only increases they would be entitled to would be COLA adjustments (cost-of-living adjustments). The simple math is that if they had waited until they hit the full retirement age of 67 this year, they would have locked in $3,882 per month each or a combined $7,764 for the rest of their lives, subject to COLA increases going forward. The difference in what they locked in five years ago compared to if they had waited until this year is $3,346 — which would be double what they collect now.”
And even though that couple had five earlier years of claiming benefits, it would take less than seven years of receiving benefits at the full retirement age amount to close the gap. So from 74 onward, they would have received an extra $3,346 monthly as a net positive.
The decision of when to claim can come down to health and how strapped for the income you are, said Orestis, but if you can afford it and feel like you have a good chance to live long enough for the math to support waiting, claiming early could be a mistake.
2. Missing Out on Spousal/Survivors Benefits
Another Social Security mistake could be missing out on a higher amount based on benefits stemming from your spouse, particularly if you are divorced or have a deceased spouse.
The way Social Security retirement benefits work is that you don’t necessarily have to collect the amount that you qualify for based strictly on your work history. Instead, you might get a higher amount based on your spouse, but the rules can be tricky.
For example, to claim a higher spousal benefit amount of up to 50% of your ex-spouse’s benefit, you need to meet requirements like having been married for at least 10 years and not having remarried.
Those with a deceased spouse may be eligible to apply for survivor benefits and receive up to 100% of their spouse’s Social Security benefit, depending on factors like the claiming spouse’s age.
“I have seen too many people that were either divorced or widows or widowers not getting their timing right, not filing right, and missing out on those benefits and missing out on a lot of money,” said Orestis.
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3. Ignoring Federal Income Taxes
Another Social Security mistake that can cost you money or impact your lifestyle is ignoring income taxes on Social Security benefits. Around 40% of Americans pay federal income taxes on some of their Social Security benefits, according to the Social Security Administration. The taxable amount depends on your income. So if you continue to work while collecting Social Security, for instance, some of that earned income could be offset by taxes.
“I have seen some people just absolutely shocked,” said Orestis. They might have had a year of collecting Social Security benefits only to then get a letter from Social Security notifying them that based on their income tax filing, their Social Security benefits will now be taxed, thereby reducing the benefit, he explained.
That doesn’t mean you shouldn’t work while collecting Social Security, but it’s important to account for taxes rather than assume you’ll get your full benefit.
“What I’ve always advised people is, if you’re on Social Security and you’re looking at working, you’ve got to do the math,” Orestis said. “Is it worth working, commuting, spending money to do whatever you have to do to have a job?”
Getting Help
While Social Security benefits can be confusing and lead to mistakes, taking the time to understand your benefits can go a long way toward maximizing your finances. And the good news is that there are free resources you can turn to.
“You can reach out to Social Security offices and they’ll help you run those numbers,” said Orestis. “There are local Social Security offices in cities all over the United States. You call in and set an appointment, either [remote] or in person, and you can walk through these scenarios and get good advice right from the source.”
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This article originally appeared on GOBankingRates.com: Avoid These Social Security Mistakes: How One Couple Lost $3,346 per Month in Benefits
