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3 Huge Social Security Mistakes You Should Avoid

By Maurie Backman - Apr 17, 2016 at 8:21PM

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You'll want to pay attention to these.

A good 65 million Americans rely on Social Security as a source of income in retirement, which means it's all the more important that current and future beneficiaries understand the nuances of the program. Whether you're planning to take Social Security in 2016 or at some point in the future, here are three major mistakes you'll want to avoid.

Image source: Pixabay.

1. Claiming benefits too early
Once you reach 62, you're allowed to start taking benefits. In fact, 62 is actually the most popular age for people to begin claiming Social Security. The problem, however, is that taking benefits early could mean losing out on a significant amount of income over time. For each year you claim benefits before your designated full retirement age, you'll lose a portion of your full benefit amount.

Let's say your full retirement age is 67, but you opt to start taking benefits at age 62. Doing so will result in about a 30% reduction in benefits. Now let's apply some numbers. Say your full monthly benefit is $1,200, but it gets reduced to $840 because you start taking benefits at 62. Now let's assume you live to age 90 (because it never hurts to be optimistic). Over the course of 28 years, you'll have collected a total of $282,000 in benefits.

But watch what happens if you decide to wait until your full retirement age of 67 to take your benefits. Rather than collecting just $840 a month, you'll get the full $1,200, and over the course of 23 years, that's a total of $331,000 -- almost $50,000 more in lifetime benefits than you would've gotten by claiming early.

Waiting to claim Social Security is especially smart if you expect to live a long life or to have surviving family members who will rely on your Social Security benefits when you pass on. That said, if you need those benefits as soon as possible and you don't have survivors to think about, then by all means, claim Social Security early. Just be sure to keep the big picture in mind, no matter your choice.

2. Retiring too soon
Your Social Security benefits are calculated based on your top 35 years of earnings. So if you only worked a total of 30 years, for example, then you'll have five years of $0 in income factored into your benefit amount.

Years of low or no earnings can reduce your retirement benefit substantially. For this reason, you may want to hold off on retiring until you've put in enough working years to replace some of those years when you earned little to no money -- especially if you're making more money now than you were earlier in your career. Even a year or two of part-time earnings can compensate for some of those $0 years. Remember, too, that your 35 working years don't have to be consecutive. If you left the workforce in your 30s or 40s to raise children or care for an ill family member, you can still knock out a bunch of those $0 years by working later in life.

3. Relying solely on Social Security to fund your retirement
Social Security helps countless retirees stay afloat financially, but you should never make the mistake of thinking you'll be able to live off your Social Security benefits alone. The Social Security Administration itself says that its benefits are only designed to replace about 40% of the average worker's income. Meanwhile, most retirees need 70% or more of their pre-retirement income to live comfortably once they exit the workforce, which means you'll be doing yourself a major disservice by not saving enough money to bridge that gap.

Furthermore, though Social Security is theoretically designed to keep up with inflation, in practice, it often falls short. Because cost-of-living adjustments aren't guaranteed, you may find that your benefits remain stagnant while your expenses continue to climb. The best way to protect yourself financially in retirement is to save independently and consider your Social Security benefits only supplemental.

Social Security rules can be pretty complex, so before you make any moves, read up on how the program works and take the time to understand your benefits. The more thorough and strategic you are, the better your benefits will serve you when you need them the most.

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