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How to Maximize Your Social Security Income: 3 Mistakes to Avoid

Did you know that half of Americans 65 and older rely on Social Security for at least 50% of their family income? And, according to the Social Security Administration, the average benefit in December 2013 was $1,294 per month for retired workers -- while the maximum benefit for a worker retiring at full retirement age is $2,642. That's a big difference! Maximizing your Social Security income is critically important and requires planning. Make sure you're on the right path by avoiding these top Social Security mistakes.

1. Collecting too early
Claiming Social Security benefits too soon can cost you thousands of dollars over your lifetime. If you wait until full retirement age (67 for those born 1960 and later), your monthly benefit will be about 30% higher than if you had started receiving benefits at age 62, when you first become eligible. You can increase your payments another 8% annually (via delayed retirement credits) by applying for benefits at full retirement age and then requesting to have payments suspended until you turn 70.

Consider this example: Worker Joe Jones is eligible for a monthly Social Security benefit of $1,960 at his full retirement age of 66. Let's compare the total amount of benefits he would receive over his lifetime at early retirement, full retirement, and late retirement (assuming he lives until age 90):

  • Starting at age 62 (taking a reduced benefit): $495,163
  • Starting at age 66 (taking full benefits): $564,480
  • Starting at age 70 (taking advantage of an increased benefit and delayed-retirement credits): $620,928 

The difference can be as much as $125,765 in retirement income, which can have a significant impact on your retirement lifestyle.

2. Not considering spousal benefits
Filing early for Social Security can have consequences for spousal benefits, too. When you apply for retirement benefits, your spouse may also be eligible for benefits based on your earnings -- up to 50% of the benefit you receive. If you take reduced benefits as a result of early retirement, your spouse's benefit will be similarly reduced.

The issue becomes more complicated if your spouse is entitled to benefits of his or her own. If your spouse waits until full retirement age to file for benefits, he or she could opt to take the spousal benefit and allow the benefit based on his or her own earnings to grow through delayed retirement credits. Whether this is the best strategy, though, depends on which benefit would produce a higher retirement income.

3. Accelerating traditional IRA withdrawals just because you can
You're eligible to begin receiving penalty-free income from traditional IRAs at age 59-1/2, but you aren't required to until age 70-1/2. You might be tempted to start taking withdrawals as soon as you can, but if you do, keep in mind that this additional income could impact the amount of your tax liability -- especially when combined with your Social Security income. You could get a shock when you have to pay your first adjusted tax bill. The takeaway: Don't start piling on the income without any sort of planning.

Don't be one of those retired workers receiving a mere portion of the Social Security benefit they could be collecting. You work too hard for your money to let that happen. Talk with an investment advisor to make sure you're maximizing your Social Security benefits and producing the highest retirement income possible.

How to get even more income during retirement
Social Security plays a key role in your financial security, but it's not the only way to boost your retirement income. In our brand-new free report, our retirement experts give their insight on a simple strategy to take advantage of a little-known IRS rule that can help ensure a more comfortable retirement for you and your family. Click here to get your copy today.

Read/Post Comments (3) | Recommend This Article (19)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 26, 2014, at 8:20 PM, DallasBill wrote:

    All of these articles forget the same thing. The increase in benefit is based upon 2 factors. The expected benefit payout is expected to go down with age. The average person doesn't live to 90, more like 75 or less. Part of the estimate that causes your SS benefit to increase is that you continue to work. My wife quit working at 60 after we got married. I have been laid off a couple of times. Maintaining a job from 60 on is turning out to be difficult. This article ran the numbers assuming that everyone was going to live until 90. Rerun them with an expectancy of 75 or 80.

    Even if I live to 90, I will need constant assistance. If you knew you were going to die or become immobile by 75 or 80 would you continue working for a few extra bucks or would you rather have that good retirement time (age 60-70) to spend with your family?

  • Report this Comment On April 27, 2014, at 8:12 AM, Davedeec wrote:

    Your math is correct but your analogy is leaving out one variable which is dollars not taken when qualified. Using your numbers, if I wait till 66 to take the $1960 vs the $1473 you must calculate the lost dollars not taken at qualification. So if I forgo 4 years at $1473 month it equals $70,704. So I must subtract this from the $564,480 = $493,776. It will take 6 months at $1960 to make up the money I was eligible for but didn't take. So, actually I will make $1152 more by taking my money at my first qualified day. This is the scam the government wants you to buy into. They are playing the life expectancy game hoping you are enticed to wait for a bigger payout and die sooner.

  • Report this Comment On April 27, 2014, at 8:30 AM, Davedeec wrote:

    Scott you should really do research before writing. After I posted above I did a little searching and found life expectancy in the US is 75.96 yrs. why did you use 90???? Your analogy is totally wrong in this article. What was the Fool thinking by allowing you to publish this...I guess this is the "amusement" part of the news letter.

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