Social Security rules can be confusing, and the many ins and outs of the program create opportunities for you to make mistakes. But don't worry -- we're here to help. Read on to learn what our Motley Fool experts say are some big blunders you should avoid when it comes to Social Security.
Many people don't appreciate just how much their Social Security benefits are tied to their earnings. Benefits are based on your working history, and in order to qualify, you need 40 "credits." These credits are accrued by earning income; in 2015, you receive one credit for every $1,220 you earn. You can earn up to four credits per year -- and most workers do, given the low income required -- so working for at least 10 years will probably be enough to qualify you. However, to collect as much as possible, you'll want to work for 35 years.
That's because your benefit is calculated based on the 35 years of your working history with the highest "indexed" earnings. If you work for 40 years, the five years with the lowest earnings won't count. And if you work for 30 years, you'll get five zeroes factored into your average earnings. And don't worry if inflation makes your earliest income look comparatively tiny; the Social Security Administration adjusts your earnings for inflation so it can produce a fair average.
Clearly, then, you might make a big mistake if you choose to retire after working only 25 years -- especially if you're expecting Social Security to be a significant income source in retirement. Retiring early is fine for many people so long as they've accumulated enough resources to support them in retirement and aren't expecting Social Security to do the heavy lifting. But if you're not prepared to support yourself after you exit the workforce, you should consider working for a total of at least 35 years. This benefit estimator from the SSA (or this simpler estimator) can help you get an idea of what your monthly Social Security check might look like based on your earnings history.
One mistake many couples make with Social Security involves getting confused about how spousal benefits relate to their own retirement benefits. Many readers ask whether they can take spousal benefits at age 62 and then take their own retirement benefits later. Their hope is that they can get money now through their spouse's work history while letting their own retirement benefits grow over time before claiming them later in their retirement.
The reason this strategy doesn't work is that you're not allowed to take spousal benefits before you reach full retirement age unless you also claim any of your own retirement benefits that you're entitled to receive. Even if you don't want your own benefits early, the Social Security Administration will deem you to have claimed them if you file for early spousal benefits. As a result, the amount you'll receive will be the greater of the retirement benefits you're entitled to and what your spousal benefit would be. Moreover, you won't be eligible to receive delayed-retirement credits or use other strategies to boost total Social Security payments. If you want to use some of the more sophisticated Social Security strategies involving spousal benefits, you typically have to wait until you reach the full retirement age of 66 before claiming Social Security.
One critical mistake to avoid is taking Social Security benefits at age 62. This is the earliest possible age at which you can claim Social Security, which means you'll receive the smallest possible monthly checks for the rest of your life. Most people would be better off taking Social Security at their full retirement age, thus receiving their full benefits for the rest of their life.
About 40% of people start taking Social Security benefits the month they turn 62. Assuming a full retirement age of 66, the penalty for taking Social Security at 62 is that your benefits are reduced by 25% compared to what you would receive if you waited until your full retirement age. By claiming early, you get four extra years of these reduced payments. By claiming early, you'll be ahead in total benefits until age 78, when you'll break even with the amount you would have received by waiting until the age of 66.
You may think 78 seems like a long time to wait to reach breakeven. However, data from the 2010 census shows that most people who live to age 62 will make it past the age of 78. Among those who make it to age 62, 75% of females and 65% of males will make it to age 78, so a significant majority of retirees would receive more in lifetime benefits if they waited until their full retirement age to claim Social Security, rather than claiming at the earliest possible age.
Medical advances are extending people's productive lives longer than ever before. The odds of enjoying a decades-long long retirement grow every year. If you have the option, it makes sense to wait until your full retirement age -- or even later -- to claim Social Security.