The best time to start thinking about your retirement is before the boss does.
-- Author unknown
The quotation above might be amusing, but there's also some wisdom in it. Many people have retirement plans and an idea in their head of when they will stop working, but life often doesn't unfold as planned.
According to the results from the Transamerica Retirement Survey of American workers, released in late 2016, 56% of women and 59% of men expect to retire after age 65 or not at all. Meanwhile, though, the average retirement age was recently 63 -- and the age at which most people start collecting Social Security is 62. To better prepare for that phase of our lives, we need to be flexible when planning for retirement, and to avoid as many costly mistakes as possible.
Here are seven Social Security mistakes to avoid, if you'd like to get as much as possible out of the program and enjoy a more financially secure retirement.
Social Security mistake No. 1: Thinking you don't qualify for any benefits
If you are assuming that you're out of luck when it comes to Social Security benefits, you may be pleasantly surprised to learn that even if you've worked mostly in the home, without receiving paychecks or having much or any taxable income, you may still qualify for Social Security benefits. That's because if you're married, divorced, or widowed, you may be able to claim benefits based on your current, ex-, 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.)
Social Security mistake No. 2: Thinking that your benefits will be substantial
Perhaps ironically, your Social Security benefits aren't likely to be nearly as generous as you'd like -- but they're still likely to make up a hefty chunk of your retirement income. According to the Social Security Administration, the majority of elderly beneficiaries get 50% or more of their income from Social Security, while 22% of married elderly beneficiaries and 47% of unmarried ones get fully 90% or more of their income from it.
The average monthly Social Security retirement benefit was recently $1,365, which amounts to $16,380 per year. If your earnings have been above average, you'll collect more than that -- up to the maximum monthly Social Security benefit of $2,687 for those retiring at their full retirement age. (That's about $32,000 for the whole year.) You can get an estimate of your expected Social Security benefits by setting up a "my Social Security" account with the SSA.
Social Security mistake No. 3: Assuming you have to start collecting benefits at 65
Many people may be under the impression that they need to start collecting benefits at age 65, but that's not necessarily the case. The normal (or "full") retirement age used to be 65, but it has been increased for many of us. For those born in 1937 or earlier, it's 65, and for those born in 1960 or later, it's 67. 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.
Social Security mistake No. 4: Starting to collect benefits too early -- or too late
Starting to collect benefits too early or too late can be another Social Security mistake. By starting them at age 62, they may be about 30% smaller than they would have been had you started at your full retirement age. That's not necessarily a mistake, though, because the system is designed so that total benefits received are about the same for people with average life spans no matter when they start collecting. If you opt to begin receiving benefits at age 62, the amount will be considerably smaller, but you'll receive many more monthly payments.
Despite that, though, if you expect to have ample income at 62 and perhaps for a few more years, and people in your family tend to live very long lives, you might want to start collecting later. By delaying when you start collecting Social Security, you can make your benefit checks bigger. Specifically, for every year beyond your full retirement age that you delay, you'll increase their value by about 8% -- until age 70. So delaying from age 67 to 70 can leave you with checks about 24% fatter. Remember, though, that it will still be a wash, if you live an average life span. Thus, it's up to you, considering your personal situation, to decide when to start collecting. There's no one-age-fits-all answer.
Social Security mistake No. 5: Not making the most of the benefit formula
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 28 years, the formula will be incorporating seven years of zero earnings, which will shrink your benefits considerably. If you're planning to retire after 33 years of work, it might be worth it to work 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), 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.
Social Security mistake No. 6: Not sharing a strategy with your spouse
Not coordinating with your spouse when you each start collecting is another classic Social Security mistake. Married couples have many more ways to strategize about Social Security than single and never-married people do. For example, a couple 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.
Social Security mistake No. 7: Assuming that Social Security will end soon
Finally, based on some media coverage, you might be assuming that the Social Security program is on its last legs. Things are not quite so bad, though. The Social Security trust funds have been running a surplus in every year since 1982, taking in more from taxes and interest earned on taxes than they pay out in benefits. Those surpluses are likely to stop around 2019, though, at which point the Social Security system can rely on incoming interest payments to make up the deficit -- for a while. According to several government estimates, if no changes are made, Social Security funds are likely to be depleted by 2034. If that happens, payment checks won't disappear, but they'll likely shrink by about 25%, leaving beneficiaries with about 75% of what they were expecting. That's not ideal, but 75% is far better than the 0% some people expect. Fortunately, there's a decent chance that the system will be shored up, one way or another. There are many possible fixes, though politicians don't agree on them. For example, it's been estimated that 77% of the trust funds' shortfall could be eliminated by increasing the Social Security tax rate for employers and employees from its current 6.2% to 7.2% in 2022 and 8.2% in 2052.
The more you know about Social Security and the more you strategize about it, the more money you'll likely be able to get out of the system.