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4 Social Security Oversights That Could Cost You Thousands in Retirement

By Sam Swenson, CFA, CPA - Feb 27, 2021 at 6:04AM

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Don't let these easy-to-miss traps derail your retirement.

Social Security, along with pension plans and personal savings, stands as one of the three main sources of income for people in retirement. Although the Social Security Trust Fund Reserves are slated to run out within the next two decades, there is still an expectation for benefits to be paid well into the future. With that said, it's imperative to know the basics and avoid the common pitfalls when it comes to filing for Social Security. Here, we discuss some of the more widespread oversights that cause people to receive less than they otherwise should. 

1. Not meeting the minimum requirements

You'll need to earn 40 Social Security credits to be eligible for filing. In 2021, one credit is earned with each $1,470 of earnings, up to a maximum of four credits per year. In order to be eligible to claim retirement benefits on your own work record, you'll therefore need to have worked at least 10 years and paid into the Social Security system over that time.

As you'll see in more detail below, spousal benefits are available to those who don't meet the work requirements themselves. However, your spouse needs to meet the minimum requirements in order for you to claim spousal benefits. It's best to check with Social Security to confirm that you or your spouse have the credits you need to get Social Security benefits. 

2. Filing too early 

Perhaps the most consequential decision is not if, but when to take Social Security. If you decide to file at age 62, you will get your money sooner, but you'll also get less of it. If you were to wait until your full retirement age -- call it 67 for simplicity -- you'd increase your monthly benefit by nearly 30%. Of course, the decision to take Social Security is a deeply personal one, and depends on your broader financial situation, health metrics, household dynamics, and desire to continue working.

According to the Social Security Administration, the average monthly benefit for someone who receives benefits at 62 is $1,130. Conversely, those who receive benefits at 67 receive an average of $1,504. Ignoring inflation, and assuming both individuals live to age 90, the person who waited will end up significantly better off. On the other hand, if both individuals lived to only age 75, the person who chose to claim benefits early would come out ahead. 

Scale balancing clock and coins

Image source: Getty Images.

3. Not knowing about spousal benefits

If you're married and either didn't work or earned significantly less than your spouse, you are eligible to take spousal benefits. This amounts to taking 50% of your spouse's benefit at your full retirement age. You'd be well-advised to do this if the monthly benefit based on your own earnings is less than half of your spouse's entitlement.

For example, if your spouse is entitled to a $3,000 monthly benefit and you only qualify for a retirement benefits of $1,000 based on your own work history, you would receive a total of $1,500 because of your spousal benefit. Two wrinkles here are that, one, your spouse will need to have claimed benefits when you attempt to claim the spousal option, and two, claiming this benefit too soon will also cause a substantial reduction in monthly payments. 

4. Failing to consider the intangibles

Yes, you may end up with more money if you wait until age 70 to claim benefits, but if you need the money sooner, it may not make sense for you to wait. This can depend on a lot of factors that no financial calculator will adequately evaluate.

The decision as to when to take Social Security is, in reality, one that is reached by by thoroughly evaluating the financial and non-financial aspects of your overall life. Given that the length of time you receive benefits is so important -- but also unknowable in advance -- it would seem that your health is one of the most useful barometers in planning your Social Security filing, along with your household's current and future cash needs. 

Usually, waiting is better

No two situations are the same, but the system tends to favor those with patience. If you wait until age 70, you'll clearly receive much more per month -- perhaps even 75% more -- than if you claim Social Security benefits at age 62. Back in reality, however, life is more complex than a financial calculator, and you might decide that taking benefits earlier to fund more immediate spending is worth it. Ultimately, whatever road you take, invest the time necessary to understand the mechanics of the payout system. 

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