Social Security is not a retirement plan itself, but it's a crucial part of one for most seniors. The government ultimately decides how much you get per check, but you can do a lot to influence that amount, for better or worse. Avoid the following mistakes if you want the largest benefit possible.
1. Not checking your earnings record
Your Social Security earnings record lists your taxable income for each year that you worked. This is what the Social Security Administration bases your benefits on, and higher annual earnings during your working years correspond to larger checks in retirement.
Most of the time, earnings records are accurate because they come from the IRS, but errors can happen. You or your employer might transpose some digits in your Social Security number when submitting tax paperwork, or you might forget to notify your employer after you've changed your name. This could result in you showing less income for the year than you actually earned -- or worse, no income at all.
Everyone should check their Social Security earnings record at least once a year to verify that all the information is accurate. You can do this by creating a my Social Security account. Don't throw out your tax returns until you've done so. If you notice any errors, you'll need the returns to prove your actual income for the year. Fill out a Request for Correction of Earnings Record and submit the form with a copy of your documentation to the Social Security Administration.
2. Not thinking through when to start benefits
Everyone knows you can start benefits at 62, but many don't realize that doing so permanently reduces your monthly checks. If you want the full benefit you're entitled to based on your work record, you must wait to begin retirement benefits until your full retirement age (FRA). This is 66 or 67, depending on the year you were born. Every month you take benefits before this age reduces the size of your checks permanently. Those who begin at 62 will only get 70% of their scheduled benefit per check if their FRA is 67, or 75% if their FRA is 66.
You can also delay retirement benefits past your FRA, and your checks will increase by 2/3 of 1% every month. This maxes out at 70 when you become eligible for 124% of your scheduled benefit per check if your FRA is 67, or 132% if your FRA is 66. Delaying can be the better choice if you want to maximize your benefits and expect to live a long life, but not everyone can afford to do this.
Your my Social Security account can help you estimate your benefits at different ages. Estimate your lifetime benefit by multiplying your monthly check amount by 12 to get your annual benefit, and then multiply this amount by the number of years you expect to claim benefits. For example, a $1,000 monthly benefit claimed for 20 years would give you a lifetime benefit of $240,000. If possible, try to wait to claim until the age that you believe will give you the greatest lifetime total benefits.
Those who are married also have to consider their spouse's plan for Social Security. One common strategy couples use to maximize their benefits is for the lower-earning spouse to claim benefits at 62 so the higher-earning spouse can delay benefits until 70. Then, if the lower-earning spouse would be entitled to a larger spousal benefit than the one they're already claiming on their own work record, the Social Security Administration will automatically switch them over when the higher-earning spouse applies for benefits.
3. Not understanding how Social Security is taxed
You could owe taxes on your Social Security benefits in retirement, which might deplete your personal savings faster than you anticipated. Planning for these taxes now can help you avoid unpleasant surprises and may play into your decision about when to take benefits.
How much you could owe in taxes depends on your combined income -- your adjusted gross income (AGI) plus any nontaxable interest and half your Social Security benefits -- as well as your tax filing status and your state of residence. Individuals with combined incomes greater than $25,000 and married couples filing jointly with combined incomes greater than $32,000 could owe federal taxes on up to 50% of their Social Security benefits. Individuals with combined incomes exceeding $34,000 and married couples filing jointly with combined incomes exceeding $44,000 could pay federal taxes on up to 85% of their benefits. A few states also tax Social Security benefits, but each has its own income thresholds.
Some households may not be able to avoid paying taxes on their Social Security benefits, but if you expect to be close to this threshold, you should consider delaying benefits, especially if you anticipate your combined income dropping off in the future, because you might be able to hold on to more of your benefits that way.
Learning the ins and outs of Social Security isn't something most people find exciting. But free money? That'll get almost anyone's attention. If you want to get the largest Social Security checks possible, you need to understand how the program works and avoid the three mistakes listed above.