How to Maximize Your Social Security Income: 3 Mistakes to Avoid

Maximizing your Social Security income is critically important and requires planning. Make sure you're on the right path by avoiding these top Social Security mistakes.

The Mutual
Scott Holsopple
Apr 26, 2014 at 1:30PM
Investment Planning

Did you know that half of Americans 65 and older rely on Social Security for at least 50% of their family income? And, according to the Social Security Administration, the average benefit in December 2013 was $1,294 per month for retired workers -- while the maximum benefit for a worker retiring at full retirement age is $2,642. That's a big difference! Maximizing your Social Security income is critically important and requires planning. Make sure you're on the right path by avoiding these top Social Security mistakes.

1. Collecting too early
Claiming Social Security benefits too soon can cost you thousands of dollars over your lifetime. If you wait until full retirement age (67 for those born 1960 and later), your monthly benefit will be about 30% higher than if you had started receiving benefits at age 62, when you first become eligible. You can increase your payments another 8% annually (via delayed retirement credits) by applying for benefits at full retirement age and then requesting to have payments suspended until you turn 70.

Consider this example: Worker Joe Jones is eligible for a monthly Social Security benefit of $1,960 at his full retirement age of 66. Let's compare the total amount of benefits he would receive over his lifetime at early retirement, full retirement, and late retirement (assuming he lives until age 90):

  • Starting at age 62 (taking a reduced benefit): $495,163
  • Starting at age 66 (taking full benefits): $564,480
  • Starting at age 70 (taking advantage of an increased benefit and delayed-retirement credits): $620,928 

The difference can be as much as $125,765 in retirement income, which can have a significant impact on your retirement lifestyle.

2. Not considering spousal benefits
Filing early for Social Security can have consequences for spousal benefits, too. When you apply for retirement benefits, your spouse may also be eligible for benefits based on your earnings -- up to 50% of the benefit you receive. If you take reduced benefits as a result of early retirement, your spouse's benefit will be similarly reduced.

The issue becomes more complicated if your spouse is entitled to benefits of his or her own. If your spouse waits until full retirement age to file for benefits, he or she could opt to take the spousal benefit and allow the benefit based on his or her own earnings to grow through delayed retirement credits. Whether this is the best strategy, though, depends on which benefit would produce a higher retirement income.

3. Accelerating traditional IRA withdrawals just because you can
You're eligible to begin receiving penalty-free income from traditional IRAs at age 59-1/2, but you aren't required to until age 70-1/2. You might be tempted to start taking withdrawals as soon as you can, but if you do, keep in mind that this additional income could impact the amount of your tax liability -- especially when combined with your Social Security income. You could get a shock when you have to pay your first adjusted tax bill. The takeaway: Don't start piling on the income without any sort of planning.

Don't be one of those retired workers receiving a mere portion of the Social Security benefit they could be collecting. You work too hard for your money to let that happen. Talk with an investment advisor to make sure you're maximizing your Social Security benefits and producing the highest retirement income possible.