Social Security will probably be a pretty big source of income for your retirement -- at least if you're like most Americans. However, while Social Security provides benefits to millions of seniors, many of the people who claim those benefits don't really understand how the program works.
If you're soon to become a Social Security recipient, it's imperative you understand a few things about how your benefits are determined so you can avoid costly errors that could leave you with a permanently reduced income during your golden years.
In particular, there are three mistakes you absolutely don't want to make.
1. Claiming benefits before you understand how they work
According to a survey conducted by Nationwide, 91% of older adults have no idea what factors impact the Social Security benefits they'll receive after retirement. If you don't know the factors affecting your income, you could make bad decisions about when to claim benefits.
In particular, you should know:
- How your age affects your retirement benefits. If you retire before full retirement age, your monthly income will be permanently reduced. If you retire after FRA, you earn delayed retirement credits so that your income goes up for each month you delay until your 70th birthday. The reduction or increase in benefits is permanent, so understand it before you decide at what age to claim benefits.
- How your work history affects your benefits. Your Social Security benefits amount is calculated based on a formula that takes into account your highest 35 years of earnings. If you work less than 35 years, you'll have years of $0 wages factored into your calculation, and benefits will be lower. But, if you work longer, you can replace some of the early years when you earned low wages with some later years in your career, when your income was higher.
- How your marital status affects your benefits. If you're married, divorced after being married for at least 10 years, or widowed, you may be able to claim benefits based on your spouse's work record. You should work out a Social Security claiming strategy with your spouse that maximizes the benefits you both receive.
Once you've claimed benefits, undoing your claim is difficult or impossible. If you change your mind within 12 months, you can choose a different claiming strategy -- but you'll have to pay back all of the benefits received. Talk with a financial advisor or do your research before claiming benefits if you're not 100% certain you know how to maximize your Social Security income.
2. Relying on the Social Security Administration to help you decide when to claim benefits
One place you may turn for help is the Social Security Administration.
Unfortunately, you can't count on the advice the SSA gives you when deciding on a claiming strategy. In fact, a report from the Inspector General found that thousands of widows and widowers were given bad advice by the SSA and missed out on more than $141 million in Social Security benefits because of it.
The Inspector General's report also revealed that the Social Security Administration had no controls or protocols to alert employees if an applicant would be better served by delaying benefits.
The employees at the SSA who provide application assistance aren't trained financial advisors, they don't know your situation, and they aren't qualified to give legal or financial advice. Don't assume the information they're giving you is enough to make decisions about income that will last the rest of your life.
3. Not applying for Social Security Disability if health issues force you into early retirement
Many people who retire early do so not because they want to, but because health issues make it impossible to continue working. If you're 62 or over and experience a serious health issue, don't make the mistake of just claiming retirement benefits if you need Social Security to support you.
Instead, consider trying to qualify for Social Security Disability. There are a few major benefits to this approach:
- You can collect Social Security Disability Insurance (SSDI) benefits until full retirement age, so you won't reduce your income by claiming retirement benefits early.
- Your SSDI benefits equal your benefits at full retirement age, so you'll have a higher monthly income than you would if you started receiving retirement benefits early.
- You become eligible for a disability freeze, which allows the Social Security Administration to ignore low-earning years -- when you were disabled -- in determining your monthly benefit amount.
While it can be difficult to qualify for SSDI benefits, the process is easier if you're in your 60s -- and it's worth trying rather than being left with a lower income for the rest of your life if health issues push you into early retirement.
It's important to understand how Social Security works
While it may seem confusing to navigate the Social Security benefits system, these benefits have been described by Stanford experts as the ideal source of retirement income. You can't afford to make mistakes when claiming benefits, so take the time to learn how the program works and maximize the income you'll need to enjoy your post-work life.