There's no doubt that Social Security can sometimes be a complex and confusing system. With so much information -- that's constantly changing, nonetheless -- going around, it's easy for some things to fall through the cracks. Here are three common Social Security mistakes you'll want to make sure you're avoiding.
1. Not knowing how much of your retirement income it'll be
Social Security plays different roles in people's retirement income. For some, it's just supplemental income. For others, it's their only source of income. Regardless of which applies to you, knowing what role Social Security will play in your retirement income is essential.
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A good starting place is figuring out how much you'll need monthly in retirement. There's no cookie-cutter method for figuring this out, but I recommend starting with the 80% rule, which says you should aim to have 80% of your last working year's income in retirement to maintain your lifestyle.
It's best to use 80% as a baseline and then adjust according to how your retirement lifestyle will measure up to your current one. Dramatically increasing your travel? You might want to up the percentage a bit. Planning to tone it down and sit still? Decreasing the percentage would likely work.
Once you have an idea of how much you'll need in retirement, you should check your earnings record to get an idea of how much Social Security you'll be receiving monthly. You can check your earnings record on the Social Security website (SSA.gov) after creating an account. It'll tell you your estimated Social Security payout depending on when you decide to begin taking benefits.
2. Earning too much while taking benefits early
The good news about claiming Social Security benefits early is that you don't have to quit earning money. The bad news is that you'll need to monitor how much you make, because it could affect your monthly payout. The Social Security retirement earnings test (RET) is a policy that affects people who claim benefits early and continue to earn above a certain threshold.
In 2023, the most you can earn in the months leading up to your full retirement age is $56,520. If you won't reach your full retirement age in 2023 and take benefits early, the most you can earn is $21,240.
Earning over the limit will reduce your monthly benefit, but by how much depends on whether you're eligible for the lower or higher threshold. Social Security reduces benefits by $1 for every $2 earned above the lower threshold and $1 for every $3 earned above the higher threshold.
Thankfully, the reduced amount will be gradually added back once you reach your full retirement age.
As an example, let's assume your full retirement age is 67, and you decide to take benefits at 64 while earning over the allowed limit. If the RET lowers your yearly benefits by $1,000, Social Security will withhold $3,000 over the three years until you turn age 67. Once you turn 67, Social Security will recalculate your monthly payments, increasing them to incrementally give you your $3,000 back.
3. Not knowing how taking benefits early or late will affect your monthly payout
Although your full retirement age -- which is based on your birth year -- is when you're eligible to receive your full retirement payout, you don't have to wait until then to begin claiming Social Security retirement benefits.
| Birth Year | Full Retirement Age |
|---|---|
| 1943 to 1954 | 66 |
| 1955 | 66 and 2 months |
| 1956 | 66 and 4 months |
| 1957 | 66 and 6 months |
| 1958 | 66 and 8 months |
| 1959 | 66 and 10 months |
| 1960 or after | 67 |
Data source: Social Security Administration
You can begin claiming benefits as early as age 62, but doing so will reduce your monthly benefit. How much it's reduced depends on how far away you are from your full retirement age. Benefits are reduced by 5/9 of 1% for each month within 36 months of your full retirement age and 5/12 of 1% monthly for each month over month 36.
You can also do the opposite and delay your benefits past your full retirement age, which increases them by 2/3 of 1% monthly until you reach age 70.
Knowing how timing affects your benefits is important because it could be a large factor in deciding when to claim. There are many people who want to claim benefits early but realize it might not be in their best interest because of how much they may be reduced. For perspective, if your full retirement age is 67 and you claim benefits at 62, your monthly benefit will be reduced by 30%.
More than anything, it's about being informed and not getting caught off-guard.
