Common Mistakes in Claiming Social Security

Kiplinger’s Personal Finance’s recent article entitled “Avoid These 3 Common Mistakes When Claiming Social Security” says that determining when to begin your Social Security payments is a major decision and one that could mean the loss or gain of thousands of dollars for you and your spouse over your lifetime.

There are many claiming rules, hundreds of claiming strategies and personal circumstances that could come into play as you decide when to file for your benefits. A great way to start is to avoid these three common mistakes:

1. Failing to Consider Your Life Expectancy. An individual can claim Social Security benefits as early as age 62. However, if you expect to have a long retirement, you may want to wait as long as you can, so you can receive the largest payment possible. To be eligible for 100% of your earned benefits, you must reach what the Social Security Administration (SSA) refers to as your “full retirement age (FRA),” which ranges from 66 to 67, depending on your birth year. If you start your benefit at 62, your benefit will be permanently reduced, by up to 30% of what it would be if you had waited until your FRA.
2. Not Understanding Social Security Basics. In addition to age, there are a number of other factors that could impact your planning. They include:

• Marital status. If you’re married, you and your spouse should carefully plan when you file for Social Security, This has a significant impact on your combined Social Security income — both when you’re together in retirement and, later on, if one of you is widowed. People forget that when a spouse dies, the lower Social Security payment disappears, and the surviving spouse keeps only the higher of the two benefits. As a result, any increase the higher-earner can get with smart claiming strategies will add to the surviving spouse’s security in the future.
• Working. You can keep working after you begin your benefits, but depending on your age, you may be subject to an annual earnings test.
• Taxes. Social Security was originally not to be taxed. However, since 1984 it can be taxed for many people, up to 85%. The IRS measures your “provisional” (or combined) income each year to see whether you must pay taxes on your benefits. Depending on that amount, you may have to pay taxes on up to 50%, or even 85% of your benefits.
• Inflation. The SSA announces its cost-of-living adjustment (COLA) each year, usually in the 1% to 4% range. However, sometimes there’s no adjustment at all. Growing your Social Security benefit by delaying claiming — and having multiple income sources in retirement — could help you retain your purchasing power.
• Do-overs. If you file for benefits, then change your mind, you can withdraw your application and reapply later. However, it’s a one-time-only do-over, and you must withdraw within 12 months. You’ll also have to pay back any Social Security benefits you get.

3. Failing to Coordinate Social Security with Other Assets. For most retirees, their Social Security benefits will provide $500,000 to $1 million in their lifetime. However, many soon-to-be retirees give much more thought and weight to investing than they do to Social Security decisions.

Reference: Kiplinger’s Personal Finance (July 13, 2021) “Avoid These 3 Common Mistakes When Claiming Social Security”