Social Security benefits are a critical part of most Americans' retirements, so it's rather important to aim to get as much as you can from the program. I've written before about various ways that you can increase your Social Security benefits, but there are also ways that you can lose them -- or just not get as much as you could.
Here's a look at three key ways you could lose your Social Security benefits. See if any might apply to you, and keep them in mind as you plan for your retirement.
Image source: Getty Images.
No. 1: Taxes
You might think that working while collecting Social Security benefits will offer you the best of both worlds -- a little extra money from a part-time job in the early years of your retirement plus some benefits that you earned through decades of work in the past. Think again, though. You certainly could do that, but if your income passes a certain level while you're receiving Social Security benefits, those benefits may be taxed.
You'll never be taxed on more than 85% of your Social Security benefits, but you could be taxed on up to 50% or 85% of them. If Social Security benefits make up all or the vast majority of your income, you likely won't be taxed on them at all.
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:
|
Filing as |
Combined Income |
Percentage of Benefits Taxable |
|---|---|---|
|
Single individual |
Between $25,000 and $34,000 |
Up to 50% |
|
Married, filing jointly |
Between $32,000 and $44,000 |
Up to 50% |
|
Single individual |
More Than $34,000 |
Up to 85% |
|
Married, filing jointly |
More Than $44,000 |
Up to 85% |
Source: Social Security Administration.
Being taxed on your benefits isn't the worst thing, but don't let the tax catch you by surprise, and run the numbers first. Depending on how much you expect to earn, it may not be as worthwhile as you thought it would be to work while collecting benefits. You may want to skip the job or delay starting to collect benefits. (After all, delaying starting to collect will make your checks bigger.)
No. 2: Withholding
Here's another issue -- and one that can shrink your benefit checks: If you're working while receiving Social Security benefits, you may also have some of your benefit dollars withheld.
Benefits get reduced if you earn more than a certain sum while collecting benefits before your full retirement age. The Social Security Administration has explained that, "If you're younger than full retirement age during all of 2018, we must deduct $1 from your benefits for each $2 you earn above $17,040."
That might sound outrageous and unfair, but hold on -- it's not as bad as it may seem. The money withheld isn't lost; it gets factored into the benefit checks you receive later, which end up increased.
Once you reach your full retirement age, you can earn any amount of money while collecting Social Security benefits, and your benefits won't be reduced.
Image source: Getty Images.
No. 3: Poor planning
Finally, one of the worst ways to lose out on Social Security benefits is when you end up receiving less from the program overall than you would if you had made different decisions along the way. Savvy Social Security strategies and benefit-boosting moves can make a big difference.
For starters, know that among the many ways to increase your Social Security benefits, a particularly powerful strategy simply is to delay starting to collect them. All of us can start collecting our benefits as early as age 62 and as late as age 70. For every year beyond your full retirement age that you delay starting to receive 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 -- enough to turn a $2,000 check into a $2,480 one.
That can make it seem like a no-brainer to delay, but (a) many people can't afford to wait -- they need that income as soon as possible, and (b) the system is designed so that if you live an average-length life, you'll collect the same amount, overall, no matter when you start. Starting early means your checks will be smaller, but you'll get lots more of them. It's really best for many of us to start collecting at age 62 -- but if you can afford to wait and your family generally lives a long time, you might do well to delay.
If you're married, there are some particular Social Security strategies to consider. For example, you and your spouse 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, you'll both enjoy 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 can collect those bigger benefit checks as their own.
Another strategy is available only for those who are divorcing: Know that a divorced person can collect benefits based on an ex-spouse's earning history -- even if the ex has remarried -- if that spouse earned more in their working life. You need to follow the rules, though. You have to have been married for at least 10 years -- so if you're planning to divorce after, say, nine years, you might want to try to delay if you can.
The more you learn about and plan for your Social Security benefits, the bigger they may be, which can make a meaningful difference to your financial security in retirement.
