The good news about Social Security is that no matter when you start collecting, your total lifetime retirement benefits are likely to be about the same, actuarially speaking. The bad news is that despite that fact, you can still make mistakes when it comes to Social Security that can cause damage to your retirement.
Since Social Security provides over half the income for around 60% of retired Americans, it's an incredibly important part of most Americans' retirement plans. That makes it very important for you to avoid these three Social Security mistakes.
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Mistake No. 1: Claiming under full retirement age while still working
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You can claim your Social Security retirement benefit as early as age 62, with benefits increasing each year you wait until age 70. Your "full retirement age" sits between the two. That's the age that Social Security uses to estimate your benefits. That's also the age you can collect while still working without facing a severe penalty on your Social Security amount. Originally, full retirement age was age 65 for everybody, but it now stretches to age 67 for those born in 1960 or later.
The penalty for collecting while working below your full retirement age is steep. You lose $1 of Social Security benefits for every $2 you earn from work above $16,920 in the year, unless it's within the calendar year you reach your full retirement age. Within that year, the penalty is only $1 for every $3 you earn above $3,740 per month.
You should eventually get the lost money back within the 15 years after you reach full retirement age, but why claim reduced benefits early if you're not going to see the money right away?
Mistake No. 2: Expecting more from Social Security than it will deliver to you
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As of March 2017, the average retiree receives $1,365.35 per month from Social Security. Your own Social Security retirement benefit is based on the 35 highest earnings years of your career. If you retire before you have 35 years in your record, those later years will be dutifully reported as $0. The same holds true if you take a few years off to care for family or due to an extended period of unemployment.
In addition, the earlier you claim your benefits, the lower the monthly amount will be. If you were born in 1960 or later, your benefit can be cut by as much as 30% from your full retirement age benefit if you claim at age 62, and your spouse's benefit may be cut by as much as 35%.
You can create a "My Social Security Account" online at this link, and Social Security will estimate your benefits for you based on your earnings history and year of birth. Be forewarned, though, that its estimates are based on assuming you keep working and earning about the same between now and your full retirement age.
The estimates are also based on the assumption that Social Security will be able to pay its full scheduled benefits. As of now, unless changes are made, Social Security's trust funds are expected to empty around 2034, cutting benefits by around 21% from scheduled levels.
Social Security can play an important part in your retirement plan, but be aware of what you can really expect from it, and don't count on it to deliver more to you than it actually can or will. By the time you start collecting Social Security, it's generally too late to come up with an additional source of retirement income to carry you through your golden years. So if you want more from your retirement than Social Security will really give you, start planning now to improve your chances of covering that gap.
Mistake No. 3: Ignoring the impact of Medicare on your Social Security benefit
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The vast majority of American retirees age 65 and older receive their health insurance through Medicare. While most receive "Part A" (Hospital Insurance) benefits with no additional premiums, "Part B" (lab tests, surgeries, and doctor visits), comes with an additional out of pocket premium. Most Medicare Advantage, Medicare Prescription Drug Plan, and Medigap insurance plans also require monthly premiums.
Those premiums can be steep. The starting rate for Medicare Part B is $134 per person per month, and it can go up from there if your income is high enough. Premiums for the other programs vary by provider and location. Most people have their Medicare Part B premiums deducted from their Social Security checks, which reduces the net amount deposited with each Social Security check.
Medicare Part B premiums can increase over time. While Social Security benefits also increase with inflation, it's very possible for increases in Medicare Part B premiums to eat up the entirety of a Social Security inflation increase. And of course, premiums for other Medicare programs can also increase over time, cutting your net retirement income even further.
Know what to expect from Social Security
Social Security plays a big role in most retirees' finances. If you're counting on it as part of your retirement plan, know what you can really expect from it when it comes time to collect. Keep that number and these pitfalls in mind as you're building your end-to-end retirement plan, and you'll improve your chances of properly leveraging Social Security as part of your successful retirement. Ignore them, and by the time you realize what happened, it may be too late to adjust your plans.
