If you want to make the most of Social Security, you have to understand how the program works. There are plenty of great features of Social Security, but there are also traps for the unwary if you aren't familiar with the ins and outs of its rules.
There are five big mistakes many people make with their Social Security benefits.
- Waiting to claim benefits when they've already maxed out.
- Not understanding the rules for divorce and remarriage.
- Using out-of-date strategies.
- Failing to maximize benefits for the whole family.
- Forgetting about Social Security taxation.
As long as you know about them, they're pretty easy to avoid. Below, we'll tell you more about them and what you need to do to protect yourself.
1. Don't wait longer than you have to before claiming
There's a lot of controversy about the best time to claim Social Security. The right answer depends on your particular circumstances, but there are two situations in which it almost never makes sense to wait.
With retirement benefits, your payouts max out when you turn 70. If you claim at 72, you'll get the same monthly amount as you would've gotten at 70, so it doesn't make sense to wait beyond 70.
With spousal benefits, payouts max out at full retirement age. That ranges from 66 to 67 depending on your birth year. It's easy to get confused between those two types of benefits, so make sure you know which you'll qualify to receive and plan accordingly.
2. Understand Social Security, divorce, and remarriage
If you're divorced or looking at getting divorced, coordinating your Social Security benefits is essential. If you were married for at least 10 years before divorcing, then you can claim Social Security benefits on the other ex-spouse's work record. Divorce a day before your 10th anniversary, and benefits are off the table.
For ex-spousal benefits, if you remarry, you lose those benefits in favor of receiving benefits based on your new spouse's work history. However, the rules are different if your ex-spouse has passed away, as survivor benefits can continue as long as you waited until age 60 to remarry.
3. Don't use dead strategies
There are many old Social Security strategies that no longer work. Keeping up to date about the status of laws governing Social Security is important to avoid planning incorrectly for retirement.
For instance, in 2015, lawmakers eliminated the file-and-suspend strategy after a brief phase-out period. The rule used to let a worker claim benefits and then immediately suspend them, but the worker's spouse or children could claim family benefits. Now, if you suspend your benefits, your family stops getting their benefits as well if they're based on your work history.
4. Consider the whole family
If you have family members who are also claiming Social Security benefits on your work history, decision-making can get complicated. In particular, when you claim affects when your spouse and children can claim for any benefits they're entitled to receive. It also affects the amount your family members will get in survivor benefits if you pass away.
In some cases, the right move for yourself individually won't maximize total benefits for your family. Coordinating retirement, spousal, children's, and survivor benefits is the only way to be sure whether you're making the best choice.
5. Know the tax situation
Social Security benefits are subject to tax if your total income -- defined as most sources of income plus half your Social Security -- exceeds certain thresholds. For singles, income of $25,000 or more can subject up to half your benefits to taxation, while income of $34,000 or more boosts the maximum taxable amount to 85%. The numbers for joint filers are $32,000 and $44,000 respectively.
You can't always do much to avoid Social Security income taxes. But by looking at your other income sources and perhaps changing the timing of taxable withdrawals from retirement accounts, you might be able to cut your tax bill.
Make the most of Social Security
You can't afford to make mistakes with your Social Security. By knowing what traps lie in wait for you, though, you can take action to protect yourself and get the most from Social Security.