Don't Make These 6 Social Security Mistakes

Social Security income is likely to be very important to you when you're retired. So it's worth learning enough about the program to be able to avoid some common -- and costly -- mistakes.

Specifically, according to the Social Security Administration, the majority of elderly beneficiaries get 50% or more of their income from Social Security, while millions get 90% or more from it. Here are some mistakes to avoid if you want a better financial future.

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Mistake No. 1: Not knowing what Social Security income to expect

If you don't have at least a rough idea of how much income you can expect from Social Security, it will be hard to come up with a solid retirement plan. You won't know, for example, how much retirement income you'll need to generate on your own to complement Social Security and support the kind of lifestyle you want. You can find out how much you can expect to receive from Social Security via a visit to its website. For a little context, know that the average Social Security retirement benefit was recently $1,360 per month, or about $16,320 per year, while the maximum benefit for those retiring at their full retirement age was $2,687 per month -- or about $32,000 for the whole year.

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Mistake No. 2: Claiming benefits at the wrong time

Don't make the mistake of just assuming you'll start collecting Social Security at age 65. The normal (or "full") retirement age for Social Security used to be 65, but it has been increased for many of us. For those born in 1937 or earlier, it's 65; for those born in 1960 or later, it's 67, and for those born between 1937 and 1960, it's somewhere in between. Despite that, though, you can start receiving benefits as early as age 62 and as late as age 70.

Determining when it's best for you to start receiving benefits is a big deal. Start as early as age 62 and your checks will be up to 30% smaller -- but you'll receive more of them than if you started later. Delay and the checks will increase by about 8% for every year beyond your full retirement age that you delay -- until age 70. So delaying from age 67 to 70 can leave you with checks that are about 24% heftier. The difference isn't as big as it seems, though, because the system is designed so that total benefits received are about the same for those with average life spans no matter when they start collecting. So if you need the money or you expect to live an average-length life, consider starting to collect early. Or if you can afford to wait -- especially if you expect to live a longer-than-average life -- do so.

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Mistake No. 3: Not maximizing your base benefits

Meanwhile, know that you can control the size of your checks in some other ways, too. The formula used to compute your benefits is based on your earnings in the 35 years in which you earned the most money (adjusted for inflation). If you only earned income in 29 years, the formula will be incorporating six zeros, which will shrink your benefits.

If you're planning to retire after 33 years of work, it might be worth working at least two more years. Even if you have worked 35 years, if you're currently earning much more than you have in the past (on an inflation-adjusted basis), then you might consider working for another year or two, as each high-earning year will kick a low-earning year out of the calculation, boosting your benefits.

Mistake No. 4: Working too much

You can be penalized by working too little before starting to collect Social Security, but working too much once you are collecting benefits can also be regrettable. That's because if you earn too much, your benefits can end up taxed. To determine whether you'll have to pay taxes on Social Security benefits, you need to calculate your "combined" income, which is your adjusted gross income (AGI) plus non-taxable interest plus half of your Social Security benefits. The table below shows the taxation you can expect:

Data source: Social Security Administration.  

Mistake No. 5: Assuming you won't get benefits

Another common Social Security mistake that many people make is assuming that if they have worked mostly in the home, without receiving paychecks or having much or any taxable income, they're not entitled to any Social Security benefits. That's not necessarily true. Those who are married, divorced, widowed may be able to claim benefits based on their current, former, or late spouse's earnings record -- generally receiving between 50% to 100% of the spouse's benefit. (Divorcees will need to have been married for at least 10 years and not have remarried.)

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Mistake No. 6: Not coordinating with your spouse

Speaking of spouses, know that married couples have lots of options when it comes to collecting Social Security benefits and can employ various strategies. For example, they might start collecting the benefits of the spouse with the lower lifetime earnings record on time or early, while delaying starting to collect the benefits of the higher-earning spouse. That way, the couple does get some income earlier, and when the higher earner hits 70, they can collect extra-large checks. Also, should that higher-earning spouse die first, the spouse with the smaller earnings history can collect those bigger benefit checks. Failing to have a coordinated Social Security strategy with a spouse can be a costly mistake.

If you avoid making these errors, you may be able to end up collecting a few thousand additional dollars from Social Security each year -- and perhaps tens of thousands of dollars overall.