Social Security plays an important role in Americans' retirement plans. For the most part, Social Security offers a fairly straightforward proposition: Money is taken out of your paycheck while you work, then when you retire, you file and collect benefits.
Still, there are three key mistakes to avoid if you want to make the most out of the federal program. They are: signing up when you're below full retirement age and still working, expecting more that the program will actually deliver, and worrying too much over whether your benefits will be taxed.
Why these are big mistakes
Collecting early while still working: Collecting Social Security while below your full retirement age (somewhere between age 65 and 67, depending on when you were born) permanently reduces your benefit. On top of that, there is a penalty of $1 from your Social Security check for every $2 of earnings you have above $15,480 in 2014 if you are below your full retirement age for the full year.
If you work while collecting benefits under full retirement age, Social Security will eventually adjust for the money it withheld due to that penalty. Still, that cash comes later -- after you retire or reach full retirement age. That delay in payment (combined with the lowered benefit levels from collecting early) largely defeats the purpose of signing up for benefits early in the first place.
Expecting more than the program will actually deliver: Social Security expects the average monthly benefit to a retiree will be $1,328 in January 2015. It also calculates that the maximum benefit to a person retiring at full retirement age in 2015 will be $2,663 per month. Your own benefit depends on your earnings record and the age at which you start collecting, but on average it will likely be about 40% of your pre-retirement income.
If you expect to retire to a modest lifestyle in a low-cost part of the country, that might be enough. If you want more out of life, you need a sufficient nest egg to make up the difference. That takes planning. Investing takes time, typically measured in decades, to build a decent sized portfolio. The sooner you realize what Social Security will provide and prepare accordingly, the easier it will be to build a plan to cover what it won't.
Worrying too much about taxes on benefits: It's true that if your income is high enough, up to 85% of your Social Security benefits might be subject to income tax. Still, having a higher income means more money in your pocket to support your retirement lifestyle. Taxes are certainly a drag on your ability to spend, but you're still better off with a higher total income after taxes than having a smaller income just to avoid taxes on part of it.
It's your retirement -- enjoy it
Your Social Security benefit can play an important part in your retirement plan. If you avoid these three mistakes and treat Social Security as the supplemental income it was designed to be, you can improve your chances of having the retirement you're hoping for.