10 Social Security Pitfalls that Could Cost you Money

Securing your financial future relies heavily on making the right choices about Social Security. It’s a critical component of retirement planning, yet even a small mistake can lead to significant financial losses. By steering clear of common missteps, you can ensure you receive the maximum benefits available, paving the way for a more stable and fulfilling retirement. Let’s take a look at some of the pitfalls to avoid:

1. Claiming Benefits Too Early

While it might be tempting to start collecting Social Security benefits as soon as you’re eligible at age 62, doing so can significantly reduce your monthly payments. According to the Social Security Administration (SSA), claiming at age 62 could reduce your benefits by up to 30%. Instead, consider waiting until your full retirement age (FRA) or even delaying benefits until age 70 to maximize your monthly checks. 

Tip: Evaluate your financial needs and sources of income before deciding when to claim benefits. A financial planner can help you run the numbers and determine the best strategy for you.

2. Misunderstanding Your Full Retirement Age

Your FRA is determined by your birth year, and it significantly impacts your benefit amounts. Many professionals mistakenly believe that their FRA is 65, but for most, it’s actually between 66 and 67. Misjudging this can lead to unexpected reductions in your benefits. 

Example: If you were born in 1960 or later, your FRA is 67. Claiming benefits at 66 would mean accepting a permanent reduction in your monthly payments.

3. Forgetting About Spousal Benefits

Forgetting to consider spousal benefits can cost you additional income. Even if a spouse has never worked, they may be entitled to up to 50% of their partner’s benefits. 

Tip: Review your family’s earning history and collaborate with your spouse to optimize when and how each of you claims benefits for maximum household income.

4. Overlooking Continued Employment Impact

If you continue to work while receiving Social Security benefits before reaching your FRA, it’s important to understand that your benefits may be temporarily reduced due to the earnings limit imposed by the SSA. For 2024, the SSA withholds $1 from your benefits for every $2 you earn over $22,320. This means that if your annual earnings exceed this threshold, your monthly benefits could be reduced. However, once you reach your FRA, the earnings limit no longer applies, and your benefits will be recalculated to include any months where benefits were withheld. By understanding these rules, you can strategically plan your employment and retirement to minimize financial drawbacks. 

Example: If your annual earnings are $25,000 while you’re receiving Social Security benefits before your FRA, you would be $2,680 over the earnings limit ($25,000 – $22,320 = $2,680). Consequently, your benefits would be reduced by half of that excess, resulting in a $1,340 reduction ($2,680 ÷ 2). This reduction is temporary, and any withheld benefits will be recalculated once you reach your FRA. Always plan your retirement and assess your earnings to manage potential reductions effectively.

5. Ignoring the Effects of Taxes

Many professionals are surprised to learn that their Social Security benefits may be taxable. If your combined income—comprising your adjusted gross income, nontaxable interest, and half of your Social Security benefits—exceeds certain thresholds, you could owe taxes on up to 85% of your benefits. For individual filers, if your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable, while above $34,000, up to 85% of benefits may be taxable. For joint filers, those threshold amounts rise to between $32,000 and $44,000 for up to 50% taxation, and over $44,000 for up to 85% taxation. Understanding these thresholds is critical for tax planning and preventing unexpected liabilities.  

Tip: It’s advisable to consider your entire income picture, including any additional retirement funds, investments, or employment, and the implications they may have on your Social Security tax obligations. Consulting with a tax professional can provide tailored strategies to minimize tax impact, such as strategic withdrawals from retirement accounts or timing of distributions. 

6. Failing to Update Personal Information

Changes in address, bank information, or family status can affect your benefits. Ensure that the SSA has your current details to avoid delays or errors in receiving benefits. 

Example: To ensure your personal information is current with the Social Security Administration (SSA), the easiest way is to create a “my Social Security” account on the SSA’s official website. This online portal allows you to update your address, phone number, and direct deposit details conveniently from your home. Regularly checking this account ensures that any recent changes in your personal information are reflected promptly, reducing the chance of delays or errors in receiving your benefits.

7. Not Considering Survivor Benefits

If you don’t plan for survivor benefits, your family could miss out on crucial income. Spouses and sometimes dependent children can receive benefits based on your work record after you pass away. 

Tip: Include Social Security survivor benefits in your estate planning discussions to ensure your loved ones are supported.

8. Underestimating Longevity

Many professionals underestimate how long they will live and thus miscalculate their retirement needs. Given today’s longer life expectancies, planning for a retirement that could last 20 to 30 years is crucial. 

Example: Longevity calculators can help you project your lifespan more accurately, aiding in better financial planning.

9. Overlooking Disability Benefits

Social Security isn’t only for retirees; it also provides for those who become disabled. Not understanding or acknowledging these benefits can leave you unprepared if illness or injury strikes. 

Tip: Familiarize yourself with the SSA’s criteria for disability benefits and apply if you meet the conditions.

10. Not Seeking Professional Guidance

Given the complexity of Social Security, failing to seek professional advice can lead to costly errors. Financial planners, especially those with expertise in retirement planning, can help you avoid these pitfalls. 

To make the most of your Social Security benefits and ensure a secure financial future, connect with the experienced team at OpenPlan. Our experts can tailor financial strategies that align with your goals, helping you optimize your benefits and retirement savings. Reach out to us today for personalized advice and guidance. 

The information contained in this document is provided for informational purposes only and should not be construed as individualized advice. For individualized advice, please consult with your adviser.