After a wild 2020, we all want to start fresh in 2021. To have the most stable year possible, you'll need to be careful when it comes to Social Security. Here are a few mistakes to avoid in the next 12 months.
1. Claiming benefits before reaching full retirement age
Your full retirement age, or FRA, is when you're entitled to your full monthly Social Security benefit based on your earnings history. It's based on your year of birth. If you were born in 1955, your FRA is 66 and two months. That means you may reach FRA at some point in 2021, but not necessarily at the start of the year, so pay attention to dates.
For those born prior to 1955, FRA was 66 on the nose, but next year, FRA is rising, so don't accidentally claim benefits a few months early if that's not your intention. While you're allowed to file for Social Security beginning at age 62, each month you claim benefits ahead of FRA will result in a lifelong reduction.
2. Forgetting to check your annual earnings statement
Each year, the Social Security Administration (SSA) issues an earning statement that will summarize your taxable wages for the year and give you an estimate of the monthly benefit you may be in line for once you reach FRA.
It's important that you review your earnings statement for errors. A mistake that works against you, like a lower wage than what you actually earned, could result in a lower retirement benefit. If you're 60 or older, your earnings statement will come in the mail. Otherwise, you'll need to create an account on the SSA's website to access it there.
3. Not planning for extra payroll taxes
Even if you're nowhere close to claiming Social Security, you'll still be impacted by the program -- namely, in the form of the payroll taxes your wages will be subject to. Each year, there's a limit on the level of wages Social Security taxes apply to. In 2020, earnings of up to $137,700 were taxed. In 2021, however, that threshold is rising to $142,800.
Here's how that could impact you financially. If you earn at least $142,800 and you're self-employed, you'll pay a 12.4% Social Security tax on that extra $5,100, which will raise next year's tax bill by $632.40. If you're employed by another company and earn at least $142,800, you'll split that increase with your employer, so that you'll pay $316.20 and your employer will do the same. Be sure to account for those extra taxes, because while they should be deducted evenly throughout the year if you're a salaried employee, they could impact your take-home pay. If you're self-employed, you'll need to prepare to write out a larger check when you make your estimated tax payments.
4. Delaying benefits too long
If you're turning 70 in 2021 and have yet to file for Social Security, plan to do so once that birthday arrives. Though postponing your filing past FRA lets you rack up delayed retirement credits that boost your benefits by 8% a year, once you turn 70, those credits no longer accrue. As such, there's absolutely nothing to be gained by delaying your filing once you're officially 70.
You may have high hopes for 2021, whether you're on the cusp of leaving the labor force or are still working. Just be sure to avoid these critical mistakes when managing your money or kick-starting your retirement.