Figuring out Social Security is not easy. For the typical couple, there are more than 8,000 different Social Security claiming possibilities. How can you make sure you don’t make a mistake that could cost you hundreds of thousands of dollars?
Let’s take a look at five mistakes people commonly make with Social Security that could cost you a fortune.
5 Social Security Mistakes
1. Failing to coordinate benefits with their spouse.
If both spouses are eligible to receive Social Security, it’s important to coordinate when each files for benefits. In particular, the higher earning spouse should carefully consider whether it makes sense to file for early benefits or wait until they are at full retirement age. Why? Because if the higher earning spouse dies first, the surviving spouse may be eligible for a “survivor’s benefit.” This survivor’s benefit may be higher if the higher earning spouse waited until full retirement to claim Social Security.
2. Taking Social Security before reaching full retirement age and still continuing to work.
If you take Social Security prior to your full retirement age and earn income above $15,720 in 2016, the government “penalizes” you by reducing your payment until you reach full retirement age. See this earlier post where we discussed this penalty in more detail. On the positive side, once you reach full retirement age, your Social Security benefit is recalculated and you may receive a higher payment to recoup what was withheld in the years when your payment was reduced.
3. Failing to work for at least 35 years.
Your Social Security benefit is based on your highest 35 years of earnings. If you fail to work at least 35 years, then $0 is used in the calculation of your benefit for each year less than 35. It’s worth running some calculations to see how this affects your monthly Social Security payment and whether it makes sense to keep working so your benefit will be higher.
4. Not understanding the financial ramifications of taking Social Security before full retirement age.
You can start receiving Social Security retirement benefits as early as age 62, but do you want to? It’s an important question because the government penalizes you for taking early payments. Specifically, your benefits are reduced a fraction of a percent for each month before your full retirement age. On the plus side, if you delay taking Social Security until after your full retirement age, your annual payment goes up by about 8% per year until you start taking payments (you must start taking payment by age 70). There are many factors such as your financial need, health, and spousal considerations that go into this decision of when to take payments so don’t just automatically assume you should take it as soon as you can.
5. Ignoring the impact of paying taxes on your Social Security income.
Depending on the level of your total income in retirement, you may need to pay taxes on both that income and part of your Social Security income. For example, married couples filing jointly with a combined income (including both spouses) of between $32,000 and $44,000 pay tax on up to 50 percent of their Social Security income. If your combined income as a couple is more than $44,000, then you’ll pay taxes on up to 85 percent of your Social Security income.
Social Security Decisions Are Complicated
The government doesn’t make it easy here. There are so many combinations and permutations that it’s important to get expert advice on what is best for your particular situation. One bad decision could cost you many thousands of dollars in missed benefits and none of us want that to happen.
If you have any questions about today’s post or your specific financial situation, please give us a call at (913) 624-1841 or send me an email at firstname.lastname@example.org.
We are here to help you.
About Bill Keen
Bill Keen is the founder and CEO of Keen Wealth Advisors, an independent Registered Investment Adviser serving affluent clients preparing for retirement. Bill brings over 23 years of financial services experience and holds the CHARTERED RETIREMENT PLANNING COUNSELOR designation. Bill created Keen Wealth Advisors to build one of the country’s most personal and trusted wealth and retirement advisory firms. He is passionate about serving his clients as a trusted financial coach.