Social Security is easy-peasy for seniors, right? You work. You retire. You collect your benefits. It's a piece of cake -- except when it isn't.
Unfortunately, there can be some challenges in navigating the federal program that pays benefits to millions of retirees. Here are three Social Security mistakes that can cost you thousands of dollars.
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1. Claiming retirement benefits too early
Arguably the biggest mistake that many Americans make when it comes to Social Security is claiming retirement benefits too early. Doing so can cause you to miss out on a lot of money.
The Social Security Administration (SSA) imposes a financial penalty on anyone who collects retirement benefits before their full retirement age (FRA). A person who begins receiving retirement benefits at age 62 could have their benefits reduced by as much as 30%.
Even if you wait until your FRA to claim Social Security retirement benefits, you'll lose an opportunity to make more money. SSA increases retirement benefits by 8% per year (until you reach age 70) for those who hold off on claiming.
A study conducted in 2022 by the National Bureau of Economic Research found that more than 90% of Americans would be better off financially by waiting until age 70 to collect Social Security retirement benefits. This analysis concluded that the median loss over a lifetime for those who don't hold off until 70 is a whopping $182,370.
2. Misunderstanding the Social Security "earnings test"
Another way that many people could lose thousands of dollars is by misunderstanding the Social Security "earnings test." It's easy to see why there could be some confusion because the test is kind of complicated.
The earnings test only applies if you receive Social Security retirement benefits before you reach your FRA and continue to work. If you do, SSA will withhold $1 in benefits for every $2 you earn above a specified earnings limit. In 2024, this earnings limit is set at $22,320.
The rules change during the year you reach your FRA. In this case, SSA will withhold $1 in benefits for every $3 earned above a higher annual limit. In 2024, this higher limit is set at $59,520.
Perhaps the biggest misunderstanding about the earnings test, though, is that you won't lose the money withheld forever. Once you reach your FRA, your retirement benefits will be increased to pay back the total amount that had been previously deducted.
It's even possible that your base retirement benefit could be greater as a result of continuing to work. SSA uses the 35 years when you earned the most to calculate benefits. If any of the years that you continue to work after beginning to receive retirement benefits make the top 35, your monthly benefit could increase.
Some individuals who don't understand how the earnings test works could decide against working after collecting early retirement benefits. That just might be a costly decision.
3. Filing for survivor and retirement benefits at the same time
There's also a less common Social Security mistake that can result in missing out on a lot of money. Widows or widowers can receive survivor benefits based on the retirement benefits of their spouses. A potential problem can arise, though, when individuals file for survivor benefits and their own retirement benefits at the same time before reaching their FRA.
SSA will only pay one type of benefit, whichever is higher. However, filing for retirement benefits before your FRA locks in your retirement benefit at a lower amount than it would be if you waited because of the aforementioned early retirement financial penalty. Over time, this reduction in benefits can add up.
