Over the course of a long retirement, your Social Security benefits can really add up. Your lifetime payout from the program could easily be in the hundreds of thousands of dollars.
But you can also cost yourself tens of thousands of dollars in potential income from Social Security if you make one of the all-too-common mistakes outlined below.
1. Not checking your earnings record
Your monthly Social Security benefit will be based primarily on your income during your 35 highest-earning working years, adjusted for inflation. You can review your earnings record anytime using your my Social Security account.
The Social Security Administration gets its information from the IRS, so its figures are usually correct. But little things like failing to report a name change to your employer or incorrectly recording your Social Security number on a job form could result in some or all of your income for a year not showing up in your earnings record. That's a problem because it means the Social Security Administration won't consider it when calculating your benefit in retirement.
If you earned $50,000 annually (adjusted for inflation) for 35 years, your Social Security benefit would be $1,890 per month, based on the most recent benefit formula. But if your earnings record incorrectly shows even a single zero-income year in among those, that would drop your average monthly benefit to $1,852. It's only a difference of $38, but that's $38 less you're getting every month.
Over a 30-year retirement, that would add up to $13,680 lost, and that's just from your own benefits. If you have a spouse or other family member claiming their benefits based on your work record, that error would cut into their payments as well. And such problems could cost you even more if you earned more money than usual during that year your income wasn't reported, or if your earnings record has errors and missing data in multiple years.
To avoid this, double-check your earnings record on the SSI website every year against your own records. Don't get rid of old tax returns until you're sure the Social Security Administration's record is correct. If you find an error, submit a Request for Correction of Earnings Record form, along with copies of any documents you have proving your earned income for the year.
2. Claiming benefits too early
Claiming Social Security as soon as you become eligible at 62 can be appealing because it means more years of collecting benefits, but doing that also reduces the size of your monthly checks. Social Security's benefit formula calculates the amount you would receive each month if you filed at your full retirement age (FRA), which is 66 for everyone born between 1943 and 1954. For those born more recently, FRA rises by two months a year from 1955 through 1960, topping out at 67 for those born in 1960 or later.
If you choose to begin taking those benefits at a different age, the Social Security Administration applies another formula to determine how much your checks increase or decrease. If you have an FRA of 66 and file for benefits at 62, you'll only get 75% of the amount you would've gotten per month if you'd waited to start Social Security until your FRA. Those with an FRA of 67 who start taking benefits at 62 only receive 70% of their FRA benefit per month.
So if your FRA is 67 and you would have qualified for a $1,890 monthly benefit at that age, you'd only get $1,323 per month if you started claiming at 62. This isn't always the wrong choice. Those who live a shorter than average lifespan can get more out of Social Security by claiming it earlier. But those who live longer than average would shortchange themselves over the long term if they file for benefits early.
For example, let's take the scenario above, and imagine that the person in question lives to age 87. If they began claiming at 62 and received a $1,323 monthly benefit, over 25 years, they'd get a total of just under $397,000 from Social Security. But if they waited to claim until 67, they'd get $1,890 per month -- and a lifetime total of more than $453,000. That's over $56,000 more, despite the fact that they'd be receiving benefits for five fewer years.
3. Claiming benefits too late
For every month you postpone taking Social Security past your FRA until you turn 70, your monthly benefits rise. These increases top out at 124% of your base benefit if your FRA is 67 or 132% if your FRA is 66. No one will force you to begin taking Social Security at 70, but there's no incentive to delay past that. You're just costing yourself income.
Returning to our previous example, if you qualified for a $1,890 monthly benefit at 67, you'd be entitled to a $2,343 benefit if you filed when you turned 70. That would boost your yearly benefit from $22,680 to $28,116. On the one hand, that's extra money you could use to help cover your living expenses and conserve your savings, but if you fail to claim Social Security, there's no getting it back later.
You could cost yourself even more if there are others in your household who could claim benefits on your work record, like a spouse who doesn't qualify for Social Security on their own. They cannot claim benefits based on your record until you sign up, so you're also preventing them from taking advantage of the benefits they'd be eligible for.
These aren't the only ways you can reduce your total Social Security benefits, but they all underline a common point: It's not a good idea to just sign up for these benefits without doing your research. Once you do claim Social Security, it's difficult (and, after a certain point, impossible) to walk the decision back, so make sure you understand the potential long-term financial consequences of your timing choice.