Social Security checks represent about 30% of the income of the 65 and up set, according to the Social Security Administration, or SSA. What’s more, over 1 in 10 derive 90% or more of their total income from Social Security. That income has likely become even more essential to older Americans as inflation remains high.
Consumer prices ended last year 6.5% higher than where they were in the 12 months prior, according to Bureau of Labor Statistics data. And although the cost of living adjustment (COLA) increased to 8.7% in January, Social Security benefits have fallen short by as much as $1,054 since the start of the COVID-19 pandemic in 2020, according to a Senior Citizens League report.
But there are ways to maximize your benefits. MarketWatch spoke with industry experts to help you avoid these biggest and costliest potential mistakes.
#1: Social Security is your only income
As many as one in five Americans over the age of 65 count on Social Security as their primary source of income, according to a recent report from the National Academy of Social Insurance.
With beneficiaries receiving an average monthly benefit of $1,658, according to the SSA, that amount is likely not enough, says Curtis Ray, financial planner and CEO of MPI Unlimited in Gilbert, Arizona.
With estimates from the Social Security Board of Trustees projecting that the program will only be able to cover 75% of the scheduled benefits in 2035, the benefits from the program should not be something you depend on as your key retirement.
As you’re approaching retirement, check your earnings statement first to make sure you have enough credits to qualify for Social Security. If you don’t already have 35 years of earnings, consider whether working an additional year or two could help boost your Social Security benefits.
For example, if you worked a first career where you weren’t covered by Social Security, working for an extra year or two might ensure you qualify for Social Security benefits or boost your monthly benefit amount.
#2: Not Checking Your Earnings Record
Even if you’re decades away from claiming Social Security, you could be making a big mistake if you don’t keep track of your yearly earnings. The amount of Social Security benefits you receive depends on your earnings record, so if that record is incorrect, you might not receive the benefits you’re entitled to.
Errors can occur for a variety of reasons, including an employer reporting an incorrect amount of earnings or your earnings not showing up because you got married or divorced and your name change has not been processed correctly.
To avoid losing money due to errors in your earnings record, check your statement annually. If you notice errors, gather proof of your earnings to send to the Social Security Administration, such as your W-2 or pay stubs. Once the Social Security Administration has verified your claim, it will correct your record.
#3: You claim Social Security too soon
The most common mistake people make when it comes to Social Security is claiming these benefits before it’s most optimal, says Vincent Birardi, certified financial adviser at Halbert Hargrove. “Specifically,” he says, “collecting your monthly benefit at a rate that’s lower than you would be entitled to receive had you waited until a future date.”
“For every year you take Social Security early [before your full retirement age, or FRA], you are penalized and will have your lifetime benefits reduced,” says Nick Covyeau, a certified financial planner at Swell Financial in Costa Mesa, California; though he adds that for some, claiming early is smart (see below).
A retirement benefit of $1,000 is reduced by 25% to $750 for taking your benefit 48 months ahead of your 67th birthday, or the day you reach your FRA, according to the SSA.
If you wait even longer — until you turn the 70 — that benefit continues to increase up to 8% to your benefits for every year you decide to delay.
For instance; a person born on Jan. 1, 1961 who earned an average annual salary of $50,000 would take home a monthly payment of $1,386 if they were to file for Social Security at the minimum age of 62, according to AARP.
At their FRA of 67, that amount jumps to $1,980. And if they were to wait until 70, their monthly Social Security check amounts to $2,455. You can also check out this online calculator from the SSA for more.
#4: Taking Social Security Too Early
You can claim Social Security benefits as soon as you turn 62 years old. However, for everyone born after 1959, the reduction for claiming benefits at age 62 is 30%.
The lower benefits are permanent: Your benefits won’t go up once you reach full retirement age.
As much as you might like to quit your job the day you’re eligible for Social Security, that might not be the best move financially. If you’re in good health and expect to live a long retirement, waiting to maximize your benefits could be crucial in your later years.
If you can wait past full retirement age, your benefits could increase by as much as 8% per year you wait — up to age 70.
#5: You didn’t align with your spouse
Depending on a myriad of factors, the spouse of a worker who files for retirement benefits could be in line for some benefits of their own. For example, a spouse who is at least 62 — or or has a child under the age of 16 receiving Social Security disability benefits in their care — may be eligible for half of the working spouse’s earnings.
If a spouse is eligible for a retirement benefit based on his or her own earnings, and if that benefit is higher than the spousal benefit, then we pay the retirement benefit. Otherwise we pay the spousal benefit
One way to leverage this tool is “to have the lower-earning spouse elect their benefit amount beginning at full retirement age, and having the higher-earning spouse delay receiving Social Security benefits until age 70.” This, he adds, “allows for money today and for the larger benefit to continue growing.”
Then, when the higher-earning spouse with the larger Social Security benefit elects to start receiving at the age of 70, “their benefit will be the largest possible by deciding to wait,” and “their spouse will receive a raise, or benefit increase, as as they are now eligible to make the switch and start receiving 50% of the higher earners’ benefit based on the higher earner’s FRA primary insurance amount.”
Not realizing these benefits, and knowing whether you’re qualified, is like “leaving money on the table,” says Marianela Collado, a certified financial planner with Tobias Financial Advisors in Plantation, Florida.
Sometimes this is exactly the play; the lower earner may file early while spouse claims spousal and they allow their benefits to grow to age 70 and then revert the strategy to maximize benefits.
And the rules don’t stop with married couples. Check to see how much you would be eligible to receive under your spouse’s work record before deciding how to claim benefits.
If you’re divorced, you could also claim benefits under your ex-spouse’s earnings record if the marriage lasted at least 10 years, you are age 62 or older, you are unmarried, your ex-spouse is eligible to receive Social Security retirement or disability benefits, and your benefit from your own work is less than what you would receive under your ex’s earnings record.
#6: You rely too heavily on Social Security projections
If you are not currently collecting your Social Security benefits, your statements will only show projections of what you stand to collect, says Hasling.
“If you retire before your full retirement age, the Social Security benefits you see on your statements are only estimates, and they assume you will continue paying in at your current income until your full retirement age,” Hasling said, adding that “for those who choose to retire early — and stop paying in — your actual benefits in retirement might be much less than the estimates project.”
#7: Waiting Too Long To Claim Benefits
Even though the monthly benefit goes up each month you wait to claim your benefits, that doesn’t mean it’s always best to wait as long as possible. If you live to the average life expectancy, theoretically it won’t matter whether you claim benefits early or late. That’s because the amount of the benefit reduction for claiming early and the increase in benefit for delaying your claims will even out.
But very few people are precisely average. If you’re in poor health, claiming early could result in more benefits over the rest of your life. In addition, if you have cash flow trouble, an infusion of monthly benefit checks at a younger age could help you pay off debt or avoid taking on debt, which could ultimately save money in the long run.
#8: Coordinate Your Claiming Strategies
When you and your spouse work together on your Social Security plan, you can make sure you’re maximizing your combined retirement benefits.
For example, a low-earning spouse might start claiming benefits based on the high-earning spouse’s income at full retirement age. Meanwhile, the higher-earning spouse delays benefits to increase their retirement credits. This strategy can be tricky, so consulting a financial advisor is worth the cost.
#9: You didn’t check that your wages and earned income were reported correctly
The SSA says its earnings records are “about 99% accurate,” however even they admit “some errors are made.” Because employers do not always provide accurate wage information, Collado says everyone ensures that their “income was reported correctly.”
Why? Collado adds that failure to ensure this is filed accurately “will have a direct impact on the benefits.” To ensure your benefits are recorded accurately, the SSA says you can file a Personal Earnings and Benefit Estimate Statement.
Up to 85% of your Social Security benefits could be subject to federal income taxes if you earn substantial outside income, such as wages or dividends. The percentage of your benefits that are subject to income taxes depends on your combined income, which equals your adjusted gross income, any nontaxable interest income and half of your Social Security benefits.
#10: Assuming Social Security Benefits Can Fully Cover Your Living Expenses
The average monthly Social Security benefit for retired workers was $1,827 per month as of January 2023. Although it might be possible to live off Social Security alone in some instances, it would likely require a big paring down of your lifestyle. For many people, however, it may not be feasible to live entirely off of Social Security benefits.
Planning to live on Social Security alone — and then not being able to — puts you at risk for financial problems down the line.
Social Security can be a great supplement to other sources of retirement income, but it should not be your only source. Make sure you have a healthy nest egg saved in a 401(k) or IRA, and ideally set yourself up to have passive income streams that will continue to pay out in your post-9-to-5 life.
AUTHORS: Andrew Shilling – MarketWatch Picks, Gabrielle Olya – GOBankingRates