Social Security provides one of the highest anticipated retirement incomes for most working Americans – a pot of gold at the end of their professional lives. But many of the people depending on Social Security income also misunderstand it, and this ignorance can prove costly. Here are five common mistakes people make when thinking about Social Security, and why it pays to avoid them.
1. All seniors receive the same benefit
40% of working adults believe that everyone gets the same amount from Social Security in retirement. Instead, the benefit payout is tied to your earnings and the amount you contributed in Social Security taxes throughout your working years.
The Social Security Administration uses recipients' average monthly earnings over the years to calculate the dollar amount each person will receive at their full retirement age. Social Security assumes that workers who earned more during their careers will need less help in retirement. The more you earn before you retire, the smaller a percentage of that income Social Security will replace afterward.
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2. Even if you claim them early, your benefits will increase at full retirement age
You can start collecting Social Security at age 62, but you don't have to. The Social Security full retirement age, after which you start receiving benefits automatically, varies based on the year you were born: 66 for those born in 1943 and later, gradually increasing to 67 for people born in 1960 or later.
If you start collecting your benefit earlier than your full retirement age, your monthly check is slashed by almost 30%, permanently, since Social Security will be spreading the same total pool of benefit money you're owed – based on a life expectancy of 78.6 years – over more checks and a longer period of time. If you live longer than that, waiting until full retirement age will give you bigger checks for the rest of your life than you'd receive by claiming benefits earlier.
3. Annual COLA is guaranteed
The annual cost of living adjustment, or COLA, uses a subset of the Consumer Price Index known as the CPI-W to increase Social Security benefits to offset inflation.
But according to the Social Security Act, benefits only rise if the average CPI-W in the third quarter of the current year is higher than its year-ago counterpart. Some years see no benefits increase whatsoever for inflation – but only because inflation itself hasn't risen in that period.
4. It's always better to claim Social Security as early as possible.
There is no one-size-fits-all answer to this crucial question! If you file early, you'll have extra cash to travel and spend time doing the things you love to do while you are younger. You may also simply need the money, or live with health conditions that make you think you won't likely reach your full retirement age.
But if you are in average-to-excellent health, with higher than average life expectancy, you can make more money by waiting. If you're planning on working before you hit retirement age, that can possibly reduce your benefit. (More on that below.) And if your lifetime earnings exceed those of your spouse, waiting longer can assure them a higher spousal benefit, too.
5. Once I start social security benefits, I can't work anymore
You can keep working – with a few caveats. In 2022, people younger than full retirement age can bring in up to $19,560 in income without penalties. Your benefit is reduced by $1 for each $2 you earn above that amount. The earnings limit rises alongside your age, and starting with the month you reach full retirement age, there is no limit on how much you can earn and still receive your full benefits.
Just in case you're regretting the permanent reduction in benefits that comes from claiming early, or you are going back to work with a higher salary, or you are just bored, you can reverse your decision, as long as you started receiving Social Security benefits less than 12 months ago. Once in a lifetime, Social Security grants you a do-over; you can withdraw your benefits application, pay back all the money you received, and file again at a later age.
Social Security is a complex subject because of all of the variables that come into play, mixed with individuals' unique situation. Please do your own careful research and talk to your local Social Security office before making any important decisions.
