Social Security is more critical to the financial well-being of millions of Americans than many people realize. According to the Social Security Administration, most elderly beneficiaries get 50% or more of their income from Social Security, while 23% of married elderly beneficiaries and 47% of unmarried beneficiaries get 90% or more of their income from it.
Thus, it's important for us to understand how Social Security works and how we might get the most out of it instead of forfeiting benefits that could have been ours. Here are three mistakes to avoid.
Image source: Getty Images.
1. Assuming your benefits will support you
Many people assume that Social Security benefits, while not enough to permit a life of luxury, will nonetheless be enough to support them in retirement. If you're assuming that and not socking away money regularly for your retirement, you may end up in trouble.
Social Security does make up the majority of retirement income for millions of people -- but many of them are struggling and not really enjoying retirement the way we all want to. On average, Social Security benefits make up about a third of retirees' income. More specifically, the average monthly retirement benefit was recently $1,407, which amounts to nearly $17,000 per year. If your earnings have been above average, you'll collect more than that -- but it won't be a princely sum, as the maximum monthly Social Security benefit for those retiring at their full retirement age in 2018 was just $2,788, or about $33,500 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. It's smart to do so to help with your planning.
2. Collecting Social Security too early -- or too late
Another mistake to avoid is getting your benefits at a suboptimal time. The full retirement age for Social Security used to be 65 for everyone, but it has been increased for many of us. For those born in 1937 or earlier, it remains 65, for those born in 1960 or later, it's 67, and for those born between 1937 and 1960, it's somewhere in between. No matter when your full retirement age is, you can claim and start collecting your benefits as early as age 62 and as late as age 70. For every year beyond your full retirement age that you delay first receiving benefits, 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. If your full retirement age is 67 and you start collecting benefits at age 62, they will be 30% smaller.
The table below shows the approximate percentage of your full benefits that you'll get if you begin collecting at various ages. Note that many people have retirement ages between 66 and 67, such as 66 and eight months, so the table doesn't offer precise numbers for all. It still gives a rough idea of the effect of waiting or being early.
|
Start Collecting at age: |
Percentage of Benefit at Full Retirement Age of 66 |
Percentage of Benefit at Full Retirement Age of 67 |
|---|---|---|
|
62 |
75% |
70% |
|
63 |
80% |
75% |
|
64 |
86.7% |
80% |
|
65 |
93.3% |
86.7% |
|
66 |
100% |
93.3% |
|
67 |
108% |
100% |
|
68 |
116% |
108% |
|
69 |
124% |
116% |
|
70 |
132% |
124% |
Data source: Social Security Administration.
That table can make you think that it's a no-brainer to try to delay collecting until age 70. Don't think that, 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. Checks that start arriving at age 62 will be considerably smaller, but you'll receive many more of them.
Thus, for those who expect to live roughly average-length lives, starting to collect at 62 is a smart move. If you have a good chance of living an extra long life and you are able to delay starting to collect, doing so as late as you can may well be worth it.
Image source: Getty Images.
3. Not strategically maximizing your Social Security income
Finally, know that there are even more ways to try to beef up your ultimate benefits. For example, 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 zeros, which will shrink your benefits considerably. So, 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.
Not coordinating with your spouse when you each start collecting is another common -- and costly -- Social Security mistake. That's because 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 start collecting extra-large checks. Also, should that higher-earning spouse die first, the spouse with the smaller earnings history will receive those bigger benefit checks instead of his or her own smaller ones.
The more you know about Social Security, the more income you may be able to receive from the program -- potentially even thousands of dollars per year more.
