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These 5 Moves Will Shrink Your Social Security Benefits

By Maurie Backman - May 23, 2018 at 6:03AM

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Consider yourself warned.

Millions of retirees count on Social Security to pay the bills, and if you're nearing the end of your career without a whole lot of savings, you'll most likely do the same. If you're not careful, however, you could end up slashing your benefits and getting a lower payout in retirement instead. With that in mind, here are five moves to avoid if you want to get the most out of Social Security.

1. Working less than 35 years

Your Social Security benefits are calculated based on how much you earned during your top 35 working years. But if you didn't work for 35 years, you'll have a big fat $0 factored in for each year you're missing an income. Therefore, if you have the option to extend your career and work a bit longer, do it. For every year you continue working, you'll replace a $0 with an actual salary, thereby boosting your benefits.

Senior couple at a laptop


2. Taking benefits ahead of full retirement age

Though your Social Security benefits are based on your earnings history, the age at which you first claim them can cause them to get cut. If you file for benefits before your designated full retirement age, you'll lose a portion of the full monthly payment you'd otherwise be entitled to. This means that if you're looking at a full retirement age of 67 and a full monthly benefit of $1,600, filing one year ahead of schedule would knock those payments down to $1,493. If you file two years early, you'll collect just $1,386 a month. Though you're allowed to file for benefits as early as age 62, doing so will result in the maximum possible reduction, which is reason enough to wait until full retirement age, or even beyond.

3. Retiring in a state that taxes Social Security

The state you live in during retirement will dictate whether you lose a portion of your benefits to taxes. There are 13 states that tax Social Security to varying degrees:

  1. Colorado
  2. Connecticut
  3. Kansas
  4. Minnesota
  5. Missouri
  6. Montana
  7. Nebraska
  8. New Mexico
  9. North Dakota
  10. Rhode Island
  11. Utah
  12. Vermont
  13. West Virginia

Now the good news is that most of these states offer some sort of exemption that helps you avoid taxes on benefits if your income is low enough. But Minnesota, North Dakota, Vermont, and West Virginia offer no exemption at all. Of course, this isn't to say that you should automatically relocate just because your state happens to tax Social Security. Moving to another state with no tax on benefits but a higher cost of living won't do you much good. Just be aware that unless you avoid these 13 states, you might lose a portion of what could end up being your primary retirement income stream.

4. Not correcting errors on your earnings statements

As you know by now, your Social Security benefits are based on your earnings. But if the agency has the wrong salary history for you on file, you could lose out on money later in life. Imagine you worked for 35 full years, but the Social Security Administration (SSA) only has 33 years of work for you on record. If you don't take steps to correct that error, you could end up collecting a lower benefit for life.

That's why it's crucial to review your earnings statements regularly and report any mistakes that might negatively impact your benefits. If you're 60 or older, you should get a copy of those statements in the mail. Otherwise, you'll need to create an account on the SSA's website and access them there.

5. Not paying your taxes or student loans

Falling behind on your student debt won't just impact your credit; it could also cause your Social Security payments to be garnished. The same holds true if you fail to make good on your tax debt obligations. Now, technically, these moves won't reduce your benefits themselves, but rather, will prevent you from getting your hands on that money until you're paid up in full. Still, you should be aware that your benefits can be withheld to repay certain debts you're liable for.

Your Social Security benefits could spell the difference between paying the bills in retirement and struggling financially throughout. As long as you avoid these mistakes, you'll enjoy a more substantial income stream when you need it the most.

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