Social Security

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Many people look at Social Security as a straightforward program -- you simply claim your benefits and receive a monthly payment for the rest of your life. While this is true, looking at Social Security too simplistically can be a big mistake. With that in mind, we asked five of our retirement contributors to share some mistakes our readers should avoid, and here's what they had to say.

Sean Williams: One of the biggest mistakes you can make when it comes to Social Security is not understanding the basics of how your benefit payment is calculated. This isn't to say you need to be able to calculate your estimated benefit payment to a precise dollar amount -- the Social Security Administration will send you an estimated benefit payment update through the mail -- but you should understand the basics behind how the SSA will determine your benefit.

There are two important numbers you need to know when it comes to calculating your benefit: 40 and 35.

The number "40" represents the minimum number of credits you'll need in order to qualify for retired worker benefits from the Social Security program. You can only earn a maximum of four credits per year, but earning these credits is actually very easy. For each $1,220 in wages in 2015, you'll earn one credit. This income-to-credit amount is updated regularly to account for wage inflation, but working at least part-time for a 10-year period (at four credit earned per year) should qualify you for some benefits come retirement.

Secondly, "35" represents the number of years the SSA will average when determining your benefit. The SSA will take into account your highest-earning years, but if you haven't worked 35 years, the SSA will average in a $0 for each year below that mark. One mistake you'll want to avoid is making sure you don't have too many (if any) zeroes in your average as it can really weigh down your monthly benefit. If possible, consider working an extra year, or more, in order to boost your benefit.

Dan Caplinger: One thing to keep in mind with Social Security is that, all too often, strategies that can earn you extra benefits can disappear, sometimes without any notice at all. When that happens, those who were considering using those strategies but who procrastinated before taking action can get left out, with only themselves to blame for missing out on using them.

The most recent changes to the Social Security laws actually protected many current and future participants from immediately losing the strategies they addressed. Instead, they grandfathered the provisions, granting a six-month reprieve for people to use the popular file-and-suspend method to boost their total family benefit payments. The restricted application strategy got an even longer potential grandfathering period, with those who turn 62 by the end of the year having flexibility to use the strategy at any point in the future.

Nevertheless, there's no guarantee that lawmakers will be equally lenient in the future. The lesson learned is that if you see a Social Security strategy that will work for you, be careful about waiting. Instead, consider acting now to lock in a benefit that might disappear in the future. That way, you won't have to regret having had the chance to take advantage but missing out.

Jason Hall: While those who claim that Social Security will be gone in a few years overstate the danger to the system, anyone who's counting on it as their sole source of income in retirement may have to lower their standard of living substantially.

Even if the system has peaked, current retirees aren't exactly getting fat checks today. According to the SSA, the average retired man received a benefit of $1,488 per month in 2014, and the average retired woman got $1,167 per month.

These income levels put the average single retiree dangerously close to poverty. According to the SSA, the poverty threshold in 2014 was $12,081 per year. So the average a single retired woman living solely off Social Security would draw just over $14,000 per year, while the average man would draw $17,856. That's a thin line between making ends meet and skipping meals to keep the lights on.

The point is, the average benefit paid is closer to poverty than the median U.S. household income of above $50,000 per year. Even the maximum benefit for high-income earners who pay the most Social Security tax barely reaches median income levels.

If you want to have a great retirement, Social Security can help. But it's a mistake to count on it as your only source of income.

Selena Maranjian: One big mistake that many people make when it comes to Social Security is failing to take their spouse's benefits into account and not having a joint strategy. This can be especially important if there's a great disparity in the earnings history of the two partners or perhaps if there's a great difference in ages.

For example, remember that if two spouses are collecting benefits and one dies, the surviving spouse can collect the higher of the two benefit amounts. Thus, it can be smart for at least one spouse -- ideally the one who has been the bigger earner -- to delay collecting benefits in order to increase the size of their eventual checks. This can be especially valuable if one spouse earned a lot less in his or her working life than the other.

Know, too, that many spouses are eligible for a spousal benefit, which can be as much as 50% of their partner's benefit. If you qualify for a spousal benefit, you can collect it while delaying starting your own benefits -- in order to let those grow. Meanwhile, those who are divorced from people they were married to for at least 10 years may be able to receive benefits based on their former spouse's earnings. There are gobs of considerations and strategies for couples. Read up on the topic before making any Social Security decisions -- and perhaps consult a financial planning pro for advice, too.

Matt Frankel: One Social Security mistake you definitely don't want to make is to file for benefits too early. And, this is a mistake made rather often -- according to a Nationwide Retirement Institute survey, 83% of recent retirees started collecting benefits before reaching full retirement age.

Granted, some people claim early for good reasons, but not as many as you may think. In fact, that same survey found that just 38% of retirees said they claimed early because they needed the money. Many claim after their health gets in the way of working to full retirement age, and some lose their job after 62 and decide to claim benefits early.

On the other hand, many people claim Social Security early for the wrong reasons. For example, one-fourth of future retirees over age 50 say that they intend to claim benefits as early as possible (age 62) because they worry that Social Security's funding will run out. This is just plain wrong -- even though the Social Security trust funds will run out by 2034 without congressional action, the SSA will be able to cover at least three-fourths of promised benefits after that date.

Claiming Social Security early can reduce your normal retirement benefit by as much as 30% for life, so think twice before deciding to file early. If you don't need the money right away, it's probably a smart financial move to let your benefit grow.

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