Here's a shocker: According to the Social Security Administration (SSA), "Social Security benefits represent about 30% of the income of the elderly." And for more than 10% of elderly beneficiaries, it provides a whopping 90% or more of their income.
Even if you're not in the last group, it's very likely that Social Security will provide a big chunk of your income in retirement. So it's important to learn about the program and make savvy decisions regarding it. Here are some mistakes to avoid.
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1. Not working long enough
For starters, know that the formula the SSA uses to determine your benefits is based on your earnings in the 35 years in which you earned the most (on an inflation-adjusted basis, of course). So if you retire after working only 30 years, there'll be five zeroes factored into the calculation, giving you a smaller benefit. Aim to work at least 35 years -- because every additional year you work will kick out your lowest-earning year.
2. Planning to start claiming your benefits too early
You can start collecting retirement benefits as early as age 62 or at your full retirement age of 66 or 67, or you can delay collecting up to age 70. Starting early means your checks will be smaller -- though you'll receive more of them. Delaying means your checks will be larger -- though you'll receive fewer of them.
The decision of when to start collecting Social Security is a major one. If you really need the income as soon as possible or stand a decent chance of living a shorter-than-average life, claiming your benefits early can be the best move. If you can wait, though, you'll end up with larger checks for the rest of your life -- and larger cost-of-living adjustments (COLAs), too.
3. Planning to start claiming your benefits too late
It can also be a blunder to plan to collect your benefits as late as possible. Starting to receive benefits early can be smart for many people. It all depends on the person and the circumstances.
For example, if the stock market has swooned just as you retire early, you might opt to start Social Security early so that you don't have to tap your nest egg as much, giving your stocks time to recover. Social Security benefits may also help you pay for Medicare until you reach age 65 and are eligible for it.
4. Ignoring your spouse in your planning
All married folks should come up with a joint Social Security claiming strategy. A key reason is this: When one of you dies, the other will collect only one Social Security benefit -- whichever is bigger. So it can be worth trying to maximize at least the higher-earner's benefit -- especially if there's a big difference in your earnings history.
5. Ignoring your ex-spouse in your planning
Meanwhile, if you're divorced, Social Security divorce rules allow you to collect up to 50% of your ex's full retirement benefits. You'll need to wait until your own full retirement age (67 for most people these days) to receive that much -- and you'll need to have been married for at least 10 years.
If you remarry, though, the deal is off, at least with respect to spousal benefits. So keep this in mind if you're planning to marry again, especially if your new spouse's benefits are much smaller. It needn't be a deal-breaker issue, but do consider Social Security.
6. Expecting too much from Social Security benefits
Don't assume that Social Security will provide anywhere close-to-enough income when you're retired. As of September, the average benefit was $1,841, or about $22,000 over the course of a year. Clearly, that's insufficient for most people, so it's important to be saving and investing for your future throughout your working life.
You can access an estimate of how much you can expect based on your earnings history by setting up a my Social Security account at the Social Security Administration (SSA) website.
7. Expecting nothing from Social Security
Finally, don't believe sensationalistic headlines suggesting that Social Security is running out of money. It will never run out of money as long as workers are working and paying into the system. Its surplus is set to be depleted in about a decade, though, which means future beneficiaries may not receive all that they're due. (Ideally, Congress will shore up the program, and there are multiple ways to fix Social Security.)
Take some time to learn about Social Security -- and to keep up with developments regarding it. That way, you can make smart decisions that help you get as much as possible from the program.
