One of the best ways to ensure guaranteed lifetime income that keeps pace with inflation is Social Security. However, many retirees have yet to understand how to choose the optimal time to take benefits, risking the possibility of outliving their savings.
Understanding the rules and deadlines for Social Security is so important that I have become a Certified Social Security Claiming Specialist (CSSCS).
As I explore retirement income planning, each person has a unique situation. This complexity makes navigating Social Security benefits challenging, and making the wrong choices can have lasting financial consequences. Here are four significant mistakes to avoid when claiming Social Security.
1. Claiming Benefits Too Early
One of the most common mistakes is claiming Social Security benefits when you become eligible at age 62. While it may be tempting to start receiving money as early as possible, doing so can significantly reduce your monthly benefits.
Your benefit amount increases each year you delay claiming, up to age 70. For instance, if your full retirement age is 66, claiming at 62 reduces your benefits by about 25%. Consider this: taking benefits early can result in a permanent pay cut, not just for you, but also as a survivor benefit for your spouse.
If you have substantial income from pensions and investments or don’t require the income because you are still working, think about waiting until the age of 70 to claim benefits. What does this mean? Waiting until age 70 can result in a 76% larger benefit.
Let’s examine the numbers: Assume your full retirement benefit at age 66 is $ 2,000 per month, and your benefit at age 62 is $ 1,500 per month. Waiting until age 70 would provide you with $ 2,640 per month, reflecting a 76% increase from age 62.
If you are a couple with similar benefits, waiting until age 70 could result in an additional $27,360 per year in income. It is important to evaluate your financial needs and health before making this decision. Also, remember that Social Security receives cost-of-living adjustments (COLA) that can accumulate over time!
2. Not Understanding the Impact of Work on Benefits
If you plan to work while receiving Social Security benefits before reaching your full retirement age, be aware that your benefits might be reduced due to the Earnings Test. In 2025, for example, $1 in benefits will be withheld for every $2 you earn above $23,400. In the year you reach full retirement, Social Security will withhold $1 for every $3 earned over $62,160. Be sure to discuss this with your tax advisor because there are certain other stipulations you will need to keep an eye on as well.
Many retirees opt to take benefits as soon as they can but often find themselves working again, whether due to financial need or boredom, as they seek new experiences. Understanding how your earnings can impact your benefits is essential for effective planning.
3. Overlooking Spousal and Survivor Benefits
Many people should fully utilize spousal and survivor benefits.
For spousal benefits, if you’re married, you may be entitled to receive up to 50% of your spouse’s full benefit, even if you have never worked. This also applies to divorced individuals, as long as the marriage lasted at least ten years, and you are currently unmarried.
For survivor benefits, a widowed spouse may qualify to receive 100% of the deceased spouse’s benefit. This can also apply to a divorced spouse who has been married for at least 10 years, is at least 60 years old, and has not remarried before turning 60.
When determining the age to claim benefits, keep in mind that when one spouse dies, the survivor receives the higher of the two benefits. Claiming benefits early can significantly affect the surviving spouse.
Allow me to share some surprising statistics and explain why Social Security survivor benefits hold great significance:
-Eighty percent of men die married, yet eighty percent of women die single.*
-Fifty percent of women widowed after age 65 will outlive their husbands by 15 years.*
-36.5% of widowed women aged 65 and older rely on Social Security for over 90% of their income.
-The percentage of married women aged 65 who live in poverty rises nearly five-fold once they become widowed.
Source: *Kiplinger’s, “Widow’s move forward on their own – But not alone,”, Francis, 2021, **Schwartz Center for Economic Policy and Analysis, “Old Age Poverty: Single Woman, Widows and a Lack of Retirement
Social Security is one of the best resources for providing survivor income to a spouse. When we visit retirement and nursing homes, we know who most of the residents are.
4. Ignoring the Impact of Longevity
The fear of dying has been replaced by the fear of living too long. Claiming benefits early may be advantageous in the short term but can result in significantly lower monthly payments over a more extended period. I have encountered many couples whose parents lived independently in their late 80s and 90s. A longer life implies that you will need more resources, and higher monthly benefits can assist in maintaining your standard of living.
Making informed decisions about Social Security is essential for retirement. Social Security is the only program that is guaranteed for life, continues for the surviving spouse’s lifetime, adjusts for inflation, is tax-efficient, and is backed by a government promise. Avoiding these common mistakes can help maximize your benefits and maintain a comfortable lifestyle.
If you have questions about Social Security and want to learn how to optimize your income while utilizing the minimum amount of assets and paying the least amount of taxes, schedule a complimentary Social Security Optimization Review with me by visiting my online calendar. Additionally, feel free to share this article with a friend! You can also email me at katana@katanaabbott.com.
