It's important to do your best to save and invest diligently for retirement so you don't end up too heavily reliant on Social Security once your career comes to an end. But even if you manage to bring a large IRA or 401(k) balance with you into retirement, there's a good chance Social Security will end up being an important income source for you.
That's why it's so important to file for benefits strategically and avoid these major Social Security mistakes.
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1. Not taking advantage of the do-over option
The earliest a person can begin claiming Social Security is when they turn 62. However, if you don't wait until what the program designates as your full retirement age to sign up, you'll face a permanent reduction to your monthly benefits. Full retirement age for anyone born in 1960 or later will be 67, as the law stands currently.
Of course, it's pretty common for people to claim Social Security at 62 to get their money as soon as possible -- even though doing so would reduce the size of their benefits by about 30%. But if you end up regretting that decision, you don't necessarily have to just live with it.
All Social Security recipients are entitled to one do-over in their lifetime -- if they take it quickly enough. The problem is that many people don't know that option exists and therefore can't take advantage of it.
To get your do-over, you need to withdraw your application for Social Security benefits within 12 months of filing, and also repay all the benefits you received within that same time frame. After that, you'll have the option to file for Social Security later, thereby entitling you to larger monthly checks.
If you get a few months into retirement and realize that your expenses are eating into your savings more than you expected, it may pay to consider undoing your Social Security claim and finding another way to manage your budget for a while. A more generous monthly benefit could be just what you need to stretch out the longevity of your IRA or 401(k).
2. Failing to coordinate with your spouse
It may be that both you and your spouse are entitled to Social Security based on your respective earnings records. If so, it pays to have some conversations about timing before you each sign up for benefits.
It could, for example, make sense for one of you to claim Social Security at their full retirement age while the other postpones claiming to earn delayed retirement credits, and thus larger monthly payments. It might make sense for the person who delays to be the higher earner, but maybe not -- it depends on the unique situation in your household. Or, depending on your financial needs, it could make sense for both of you to delay claiming benefits. But if you each make your decisions independently, it could result in a less optimal financial situation for your household overall.
3. Delaying until 70 without considering your health
For each year you hold off on claiming Social Security past your full retirement age, your benefits get an 8% boost. So if you're entitled to what the government calculates as your "full monthly benefit at 67, but you file at 70 instead, you're looking at a permanent 24% increase to your monthly checks.
That's a nice incentive to wait. But if your goal is to get the most lifetime income out of the program, then you'll want to consider the state of your health and how likely you are to live a long life.
Filing for Social Security at 70 means missing out on many months of benefits. If you only live until your mid-70s, then a delayed claim could result in you collecting a lot less from the program over your lifetime, despite boosting your payments on a monthly basis.
No matter what the balances of your retirement accounts look like as you enter retirement, you'll probably need Social Security to cover a good chunk of your expenses. Skip these big mistakes and you can avoid causing yourself needless financial stress.
