Social Security has been referred to as a near-perfect source of retirement income by the Stanford Center for Longevity. There are a few simple reasons for that, including the fact you won't ever have to worry about the money running out during your lifetime.
Since this source of retirement funds is so important, you don't want to inadvertently do anything to diminish the size of your benefits. Unfortunately, many people do just that.
The problem comes from the fact that Social Security is a confusing program, and simple decisions can cost you thousands. To ensure you don't cost yourself, here are seven mistakes that are easy to make but important to avoid.
1. Failing to make sure your earnings record is correct
Social Security keeps a record of your earnings throughout your career. This record is used to calculate your average wage, which is in turn used to determine the amount of your benefits. Unfortunately, if your earnings record is incorrect, you might not get credit for all of the wages that you paid Social Security tax on.
You can check your earnings record on your my Social Security account for any mistakes. If earnings are missing, contact Social Security ASAP to get the problem corrected. You'll need documentation, including W-2s, tax returns, or pay stubs, so the sooner you act, the more likely it is you'll have the proof you need to get it fixed.
2. Underreporting your income
If you work for yourself, it may be tempting not to report all the income you earn so you can save on taxes. But not only could this result in an IRS audit, it will also reduce your Social Security benefits since the size of your check is based on your average wage.
To make sure you don't shortchange yourself in your retirement years, report every dollar you earn and make sure you're paying the required Social Security tax on income up to the annual wage base limit.
3. Working for too few years
As mentioned above, Social Security calculates your average wages and uses that number to determine your benefits. More specifically, the agency calculates average wages based on the 35 years in which your earnings were highest (after adjusting for inflation).
If you don't put in at least 35 years, the agency will factor in $0s for each year you're short. Obviously, this reduces your average, especially if you've been on the job for way fewer than 35 years. Aim to hit this milestone so you don't end up reducing your retirement checks.
4. Quitting work at the peak of your earnings potential
For many workers, earnings are lower early on in their careers, even after adjusting for inflation. Those years at the start of your career when you didn't earn much can drag down the average wage used to determine your benefits. But you can replace those years with higher-earning years by working more than the 35 years factored into your calculation.
If you're making a lot more late in life, staying on the job a few extra years could let you replace several low-earning years. This would bring up your average wage and raise your benefit for the rest of your life. Not doing that could be a serious mistake if you're able to continue working.
5. Claiming your benefits at the wrong time
There's no one right time to claim benefits, but there is a right time for you. You have three primary options:
- Claim at full retirement age (between age 66 and 67) and receive your standard benefit amount.
- Claim before full retirement age, which means your benefit will be reduced by early filing penalties but you'll start getting checks earlier.
- Claim after full retirement age, which enables you to raise your benefit with delayed retirement credits. But you'll get fewer checks
For those who live long enough for higher monthly benefits to make up for missed checks, delaying makes sense. But if you don't expect to live long or would rather get more checks, but smaller ones, you're better off claiming early.
Think about what makes sense for you, and don't make your choice until you understand how your age will affect your benefit amount.
6. Failing to explore all the benefits available to you
Spousal and survivors benefits could be available if you're married or widowed. And those who were married for at least 10 years could be entitled to these benefits, too, even after a divorce. These benefits could sometimes be higher if your spouse earned more than you, so make sure you understand all your options.
7. Not understanding the rules before you act
As you can see, there's a lot to know about Social Security. Before you claim your benefits, you should be sure to read up on the rules, including how your monthly benefit is calculated and how early filing could affect it. You should also makes sure you're maximizing your earnings throughout your career so you can get the highest benefit possible.
By taking the time to claim your benefits the right way for you, it maximizes the money you get from Social Security so your retirement will be more financially secure.