Social Security plays a critical role in most people's retirement planning, so making sure you avoid critical mistakes is essential. A full 59% of retirees say Social Security is a major source of their retirement income, according to a Gallup poll. And that percentage has been increasing over the last few years. One small mistake could blow up your entire budget in retirement.
If you're currently collecting, or planning to claim Social Security in 2024, you'll need to be sure to avoid these three mistakes.
Image source: Getty Images.
1. Not knowing your actual monthly benefit amount
There are a lot of factors that go into determining how much you'll actually receive from the government each month. If you don't know exactly how much you'll receive in benefits every month, it's going to be difficult to plan the rest of your budget and retirement account withdrawals. There are four big factors to consider:
First, your Social Security benefit is determined by your Primary Insurance Amount and when you claim relative to your full retirement age (FRA). Your Primary Insurance Amount, or PIA, is based on your work history, and if you've stopped working at this point, it's a fixed amount. You can look up your PIA through the My Social Security portal.
You'll receive your PIA if you apply for Social Security at your full retirement age. If you claim before your FRA, you'll receive a smaller amount. Delay beyond your FRA, and you'll see a bigger check.
Those considering claiming in 2024 will be born between 1954 and 1962. 1954 birthdays reached FRA at age 66. But those born between 1955 and 1960 will have to wait an extra two months for each year they were born after 1954. Those born in 1960 and later won't reach FRA until 67.
If you're thinking of claiming at age 62 in 2024, you'll receive a check that's 30% below your PIA. Those claiming at age 70 in 2024 will receive a check that's 32% above their PIA.
Image source: Getty Images.
The second factor affecting your monthly benefits check is Medicare Part B premiums. Most beneficiaries have their premium deducted directly from their benefits check every month. The monthly premium in 2024 is $174.70 for most retirees. That's an increase of $9.80 over last year.
The third factor affecting your monthly benefits check is the cost-of-living adjustment, or COLA. Every year, the Social Security Administration will increase your monthly benefits based on inflation. For 2024, current beneficiaries will see an increase in their monthly benefit of 3.2% (less the increased cost of Medicare).
Finally, you have to account for taxes. Some states tax Social Security benefits, but many don't. And the federal government will tax a portion of your benefits if your total income goes above a certain threshold. (More on that later.)
Underestimating or overestimating your Social Security check can be a big problem. It can affect how you manage your retirement accounts and investments, how you plan for taxes, and how much you plan to spend every month in retirement. Make sure you nail this number down in 2024.
2. Facing unexpected taxes
Your Social Security benefits can affect your taxes in more ways than one. Don't get surprised by an unexpectedly high tax bill.
The way the IRS taxes Social Security benefits relies on a metric called "combined income." This is the sum of your adjusted gross income, nontaxable interest income, and half your Social Security benefits. If your combined income exceeds a certain threshold, you'll owe taxes on a portion of your benefits. You can see that in the table below.
| Taxable Amount | Combined Income Range (Single) | Combined Income Range (Joint) |
|---|---|---|
| 0% | <$25,000 | <$32,000 |
| Up to 50% | $25,000 to $34,000 | $32,000 to $44,000 |
| Up to 85% | >$34,000 | >$44,000 |
Table source: Author. Data source: Social Security Administration.
Here's where it gets interesting. If you'd otherwise be on the cusp of one of those thresholds, you could face a sort of double taxation on some of your income.
For example, say you're a single filer collecting $20,000 per year in Social Security and you have a combined income of $35,000 in a typical year. If you need to withdraw an extra dollar from your retirement account, you'll actually get taxed on that dollar, and you'll pay tax on another $0.85 of Social Security benefits.
This phenomenon is called the Social Security "tax torpedo." Try to avoid it with careful tax planning. You may want to consult an expert for your personal situation.
3. Making too much while collecting Social Security
If you're still working while collecting Social Security, or you go back to work, you may find yourself subject to the Social Security earnings test.
The earnings test will reduce your monthly benefit check by $1 for every $2 of earned income you generate above a certain level. It applies to anyone who has yet to reach FRA. For 2024, the earnings test limit is $22,320. That limit is higher if you reach FRA in 2024 -- $59,520 -- and you'll only see a reduction of $1 per $3 over the limit.
If your benefit is reduced due to the earnings test, the Social Security Administration will recalculate your monthly benefit when you reach your FRA. It'll consider a month's worth of foregone benefits due to the earnings test as if you delayed claiming Social Security by an extra month.
While you'll eventually get what you're due from Social Security, you might be surprised to see the effect of the earnings test on your monthly benefits check while you're still working.
If you can avoid the above mistakes, you'll have a much easier time planning your budget and enjoying your retirement.
