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Steer Clear of These Common Social Security Mistakes New Retirees Make

Even for highly intelligent people Social Security can be a confusion task, fraught with potential missteps that can significantly impact long-term financial security. Each year, countless individuals inadvertently compromise their benefits through common but avoidable errors. Armed with the right information, retirees can effectively strategize to maximize their Social Security income. We’ll uncover the top mistakes retirees often make and providing tips on avoiding these pitfalls.

Full Retirement Age

Many retirees opt to take Social Security at 62, the earliest possible age, not realizing it permanently reduces their monthly benefit. For example, claiming at 62 could reduce your benefits by as much as 30% compared to waiting until full retirement age. This early decision can significantly impact financial stability later in life.

Understanding your full retirement age is crucial, as it determines when you can claim full benefits. The age varies depending on your birth year—for instance, for those born in 1960 or later, it’s 67 years old. Not knowing this can reduce your benefits if you claim too early.

Ignoring Earnings Limits

If you claim Social Security before reaching full retirement age and continue to work, your benefits might be temporarily reduced. The Social Security Administration deducts $1 from your benefits for every $2 earned above the annual limit, which in 2024 is $21,240. This reduction catches many new retirees off guard.

Social Security benefits may be taxable, depending on your overall income level. If your combined income is between $25,000 and $34,000 for individuals, up to 50% of your benefits may be taxable.

Coordinating with Spousal Benefits

Couples often fail to strategize on how to maximize their combined benefits. For instance, one strategy might be for the lower earner to claim early while the higher earner waits until 70 to maximize the survivor’s benefit.

Missing Out on Delayed Retirement Credits

By delaying benefits past full retirement age, retirees can earn delayed retirement credits, which increase their benefits by 8% per year until age 70. Many do not realize that waiting even a few years can substantially increase their monthly checks. This oversight can cost thousands over the lifespan of their benefits.

Lack of Knowledge About Survivor Benefits

Survivor benefits are available to widows and widowers, but many are unaware of how to claim them effectively. These benefits can be as much as 100% of the deceased spouse’s standard benefit, depending on the survivor’s age at claiming.

Social Security Isn’t a Constant

Some retirees mistakenly believe that once they start receiving Social Security, the amount will never change. However, benefits are adjusted annually based on the cost-of-living adjustment (COLA), which can vary widely year over year. This variation can affect budget planning for retirees who rely heavily on Social Security.

Your Social Security benefits are calculated based on your 35 highest-earning years. Errors in your earnings record can reduce your monthly benefit amount. Regularly checking your Social Security statement to ensure accuracy is essential for maximizing your benefits.

Effects of Divorce

Divorced individuals may be eligible for benefits based on their ex-spouse’s work record if the marriage lasted at least 10 years. Many divorced retirees are unaware that they could claim these benefits, which could potentially be higher than their own.

Plan for Longevity

Many retirees underestimate their lifespan and the corresponding need for prolonged financial resources. Social Security planning should consider the possibility of living into your 90s to avoid outliving your savings. A thoughtful approach can safeguard your financial future for years to come.

Overlooking Benefits for Children

Retirees with dependent children under age 19 may qualify for additional Social Security benefits for their dependents. This often-overlooked provision can help increase overall family income during retirement.

Impact of Government Pensions

Those who receive a pension from a federal, state, or local government job not covered by Social Security may see their Social Security benefits reduced due to the Windfall Elimination Provision (WEP). This provision can significantly decrease the benefit amount, a fact often overlooked until it’s too late.

Inflation’s Impact

While Social Security benefits include a COLA, the adjustments do not always keep pace with actual inflation rates. This can erode purchasing power over time, particularly in high-inflation environments. Understanding and planning for this can mitigate the impact on retirement savings.

Update Family Status

Life changes such as marriage, divorce, or the death of a spouse can affect your benefits. It’s important to report these changes to the Social Security Administration promptly to ensure your benefit calculations are accurate. Many retirees overlook this, leading to delays or errors in payments.

Outdated Advice

The rules governing Social Security change frequently, and advice that was accurate a decade ago may no longer be applicable. Relying on outdated information can lead to poor decisions regarding benefit claims. It’s vital to seek current advice or consult directly with the Social Security Administration.

Skipping Benefit Reviews

Regularly reviewing your Social Security benefits strategy is important as personal circumstances and rules change. Adjustments may be necessary to align with new financial goals or changes in health. Many retirees fail to do this, potentially missing optimizations in their benefits.

While many retirees believe they can manage Social Security planning on their own, professional advice can be invaluable. Financial planners specialized in Social Security strategies can offer insights and planning that greatly enhance benefit outcomes. This professional input is often underestimated but can significantly affect retirement comfort and security.

Josh Dudick

Josh is a financial expert with over 15 years of experience on Wall Street as a senior market strategist and trader. His career has spanned from working on the New York Stock Exchange floor to investment management and portfolio trading at Citibank, Chicago Trading Company, and Flow Traders.

Josh graduated from Cornell University with a degree from the Dyson School of Applied Economics & Management at the SC Johnson College of Business. He has held multiple professional licenses during his career, including FINRA Series 3, 7, 24, 55, Nasdaq OMX, Xetra & Eurex (German), and SIX (Swiss) trading licenses. Josh served as a senior trader and strategist, business partner, and head of futures in his former roles on Wall Street.

Josh's work and authoritative advice have appeared in major publications like Nasdaq, Forbes, The Sun, Yahoo! Finance, CBS News, Fortune, The Street, MSN Money, and Go Banking Rates. Josh currently holds areas of expertise in investing, wealth management, capital markets, taxes, real estate, cryptocurrencies, and personal finance.

Josh currently runs a wealth management business and investment firm. Additionally, he is the founder and CEO of Top Dollar, where he teaches others how to build 6-figure passive income with smart money strategies that he uses professionally.