Social Security benefits provide a “major” source of retirement income, according to 58% of retirees surveyed in an August 2024 Gallup poll. That’s significantly higher than the number of respondents who said they relied on money taken from pensions (34%) or 401k withdrawals (29%). And most people in the U.S. know they have the ability to start collecting Social Security benefits as early as age 62. But is that the best idea? Not necessarily. We’ll explain why and share other costly Social Security mistakes that could drastically reduce your retirement income.
Understanding How Social Security Benefits Work
The Social Security Administration (SSA) provides benefits to nearly 68 million Americans, but few understand all their options. In fact, the agency offers benefits not just for retirees, but survivors, spouses, and eligible dependents of insured workers. Social Security benefits are often a person’s biggest financial asset in their golden years.
Here is a high-level overview of how Social Security benefits work for most Americans:
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- You gain access to Social Security benefits by earning “work credits” over a 35-year employment history. For every $1,730 you earn from working in 2024, you’ll earn one work credit. No person can earn more than four credits per year, and the dollar amount required changes annually. You’ll need 40 work credits to draw your full retirement benefit at age 67.
- If you suddenly become too disabled to keep working before age 67, you can apply for Social Security Disability Insurance (SSDI). This is the only way to access your full Social Security benefit before your 67th birthday. However, once you stop working for 60 months, much like insurance, your SSDI coverage lapses.
- The program also pays some benefits to eligible dependents of current Social Security beneficiaries. These may include a disabled or retired worker’s current or former spouse, children, and in some cases, dependent parents. Dependents can collect up to 50% of the disabled or retired worker’s benefit per individual. Households can receive no more than 180% of any eligible worker’s full Social Security retirement benefit.
- No person can receive more than one Social Security benefit on the same work record. The federal government will not allow you to draw both retirement and disability at the same time, for example. You also cannot draw spousal benefits and retirement pay. Instead, the SSA will only award you the larger payment.
7 Social Security Mistakes That Can Wreck Your Retirement
Mistake #1: Claiming Your Monthly Social Security Benefit Too Early
Claiming Social Security too early can result in a 30% reduction in monthly benefits for the rest of your life. People can wait until age 70 to claim Social Security, which mains getting paid about 76% more money than at 62.
And according to recent research, claiming too early can cost you tens of thousands of dollars in lost Social Security income. The total amount in 2022 dollars $182,000 in lost benefits for filing at 62 instead of 67. Collecting early (before full retirement age, which is now 67) reduces your Social Security up to 30%. By contrast, collecting late (after full retirement age) increases your Social Security by 8% per year until age 70.
Mistake #2: Failing to Account for Income Taxes on Social Security Benefits
Failing to plan for taxes can lead to a higher tax burden, especially if one spouse is working while the other retires. Social Security benefits are taxable income for most people, and the IRS uses your provisional income to determine your tax rate. If provisional income exceeds $34,000 (single) or $44,000 (married), then up to 85% of your Social Security income is taxable. Consult your financial planner for help devising a smart tax strategy before you file for Social Security.
Mistake #3: Earning Too Much Money While Drawing Social Security Pay
If you choose to collect Social Security before age 67 but also keep working, the SSA may reduce your benefits. Here’s how that formula works:
- For our first example, let’s say you apply for early retirement at 62, but also work part-time. For every $2 you earn above the $22,320 limit for 2024, the SSA withholds $1 from your Social Security benefits.
- If you’re 66 when you apply, your work earnings must stay below $59,520 to keep your full Social Security payment. Otherwise, for every $3 you earn above that, the SSA reduces your Social Security benefits by $1 until your 67th birthday.
If you wait to claim Social Security benefits until after you’re 67, there’s no limit on your earnings or pay reductions. You can keep working and earn as much money as you like and draw your full Social Security pay amount, too.
Mistake #4: Not Understanding how the Social Security Administration Calculates Benefit Amounts
Your Social Security benefit entirely depends on your average monthly job income over a 35-year work history. For every year you don’t work at all, the Social Security Administration enters your annual income as $0. This can drastically reduce your final benefit amount when it’s time to file, and the people most affected are stay-at-home parents.
Mistake #5: Failing to Work Long Enough, or In the Wrong Jobs
To qualify for any Social Security benefits when you retire, you must work at least 10 years while paying into the trust fund. Approximately 90% of working men and women today pay into Social Security via payroll deductions from every paycheck. However, certain jobs that offer pensions do not pay into Social Security, such as people employed by the federal government. Service industry workers who receive tips are another example of employees that may not have Social Security insurance coverage.
Mistake #6: Falling Into the Overpayment Trap
Overpayments can happen when the Social Security Administration enters incorrect information or incorrectly calculates your benefits. In plain English, this means the SSA paid you benefits that you aren’t eligible for, based on some kind of error. If that happens to you, then you most likely must repay the entire balance owed to regain access to your benefits. Checking your Social Security history with the agency and confirming all records associated with your SSN are accurate can help prevent overpayments.
Mistake #7: Triggering a Lifetime Medicare Late Enrollment Penalty
If you’re still working at 65, you might think you can put off Medicare enrollment because you already have health insurance. That mistake could cost you quite a bit of money in the long run, though. You could pay up to 10% more in monthly premiums for life if you miss your initial Medicare enrollment period.
Key Takeaways: Avoiding Social Security Mistakes When Claiming Benefits
- Applying for early retirement before age 67 results in a permanent reduction of benefits. Applying for Social Security Disability Insurance (SSDI) at 62 can instead provide beneficiaries with up to 30% more money for life.
- Retirees should never assume that Social Security benefits alone will provide enough money to live on during retirement.
- Waiting until age 70 ensures you receive the maximum Social Security benefit allowed under federal law (24% more pay than at 67). However, you should at least try to wait until you turn 67 to file for retirement benefits.
- Working with a financial advisor to craft a retirement plan can help you avoid most Social Security mistakes.
A Financial Advisor Can Help You Avoid Most Common Social Security Mistakes
Not seeking professional advice from a financial advisor can lead to costly mistakes. An experienced retirement planner can explain ways to increase your benefit, help you understand the tax implications, and more. Considering the impact of inflation on your benefit can also help you plan for a more financially secure future.
Attending one of our educational workshops can help you make informed decisions about your Social Security benefits. You can also schedule a private meeting with your presenter for help creating a personalized plan for your retirement. Seeking professional advice can help you avoid costly Social Security mistakes and maximize your retirement income.
