Financial Literacy

Blunders That Could Eat Away at Your Social Security

It pays to understand how the system works and how to maximize your Social Security checks.

The following are some of the biggest and most costly mistakes you could make when navigating Social Security — and how to avoid making them.

1. Taking Social Security early

It’s tempting to start taking Social Security before you reach what the federal government calls your “full retirement age.” But you’ll wind up with a smaller check each month.

Technically, you should receive the same total amount of benefits over the span of your retirement no matter the age at which you claimed benefits. The Social Security system is designed to be neutral in this regard.

Still, claiming early can be risky because once you claim benefits, you will be stuck with the same size check for life. The amount of a person’s monthly benefit typically will never increase except for inflation adjustments.

If you’re the main breadwinner in your family, you may want to think twice about starting your Social Security benefit early since your spouse may receive that smaller benefit amount one day.

Jeffrey A. Drayton of Jeffrey A. Drayton Financial Planning and Wealth Management in Maple Grove, Minnesota, shares the following advice.

“When one of you dies, the surviving spouse will get to keep whichever benefit is larger. If yours is the larger benefit, do you really want to reduce it? Doing so means that you might be reducing this lifelong annuity that gets adjusted for inflation permanently not just for yourself but also your spouse.”

2. Claiming benefits and continuing to work

If you claim Social Security before reaching full retirement age and continue working, you might have to pay penalties against your Social Security benefit. It depends on how much money you earn. One solution is to wait until full retirement age to claim Social Security. There is no penalty for working while taking benefits after your full retirement age, regardless of how much income you earn.

3. Not checking your earnings record

The amount of your retirement benefit is based on your top 35 years of earnings. So, if there’s an error in your Social Security earnings record, the amount of your monthly check could suffer for it.

For example, if an employer fails to correctly report your earnings for even one year, your monthly benefit upon retiring could be around $100 less, according to the Social Security Administration (SSA). That amounts to a loss of tens of thousands of dollars over the course of your retirement.

While employers are responsible for reporting your earnings, you are responsible for checking your earnings record, as only you can confirm the information is accurate.

To review your earnings record, log into your mySocialSecurity account, or first create an account if you have yet to do so. You’ll want to check each year.

The SSA explains:

“Sooner is definitely better when it comes to identifying and reporting problems with your earnings record. As time passes, you may no longer have past tax documents and some employers may no longer be in business or able to provide past payroll information.”

4. Making an isolated decision

A Social Security decision is just one piece of a retirement income puzzle. But it can impact how you draw down other retirement income sources — such as a pension, 401(k) or cash savings. It can also impact the amount of retirement income you lose to federal or state taxes.

Failing to consider these other retirement funding factors when making Social Security decisions — as well as rushing to those decisions — can therefore cost you a big chunk of your nest egg.

You would be wise to find a reputable benefit option comparison tool or work with a financial planner who can help you evaluate options in the context of your broader financial picture.

5. Failing to understand what qualifies you for Social Security

Social Security retirement benefits are not a guarantee. You must qualify for them by paying Social Security taxes during your working years or be married to someone who qualifies for benefits. In fact, the qualification rules are complicated. The short answer most people give is that you need to work for at least 10 years. However, it is based on a system of credits and quarters, and there are different types of qualifications for different types of benefits.”

The bottom line? Know your qualification status and, if you’re ineligible, how to qualify for benefits.

To find out whether you’re eligible for retirement benefits or any other benefits administered by SSA, check out the SSA’s Benefit Eligibility Screening Tool (BEST). You can also use the tool to find out how to qualify and apply for benefits.

6. Not knowing the Social Security rules regarding divorce

You may be eligible to claim a spousal benefit based on your ex-spouse’s earnings record after a divorce. So, failing to realize this can cost you a lot. Generally, the person entitled to the smaller benefit amount may be eligible for this type of spousal benefit — provided they were married for at least 10 years, haven’t remarried and meet a few other requirements.

7. Not accounting for dependent benefits

If you still have dependent children when you claim Social Security retirement benefits, they may be eligible to receive benefits, too. An eligible child can receive up to 50 percent of your full retirement benefit amount each month, according to the SSA.

Your family would receive that amount on top of your own benefit amount. Payments to your dependents would not decrease your benefit. So, understanding the benefits that your dependents might be eligible for can help you maximize your family’s collective benefit amount.

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