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7 Common Errors That Could Jeopardize Your Social Security Benefits

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Seven Common Social Security Mistakes That Could Cost You

Social Security payments play a vital role in many retirement plans, yet numerous individuals inadvertently lower their benefits. This happens due to early claiming, misunderstandings about spousal benefits, or incorrectly assessing how income from work impacts their payments. Consulting a financial advisor can clarify these rules and assist in making informed decisions. Here are seven mistakes to avoid that can impact your Social Security benefits.

1. Claiming Benefits Too Early

Many people feel the urge to claim Social Security benefits as soon as they hit age 62, but this can be a costly choice. While it provides immediate access to cash, claiming early leads to a permanent reduction in monthly payments—up to 30% less than if benefits are claimed at full retirement age (FRA).

According to the Social Security Administration’s Annual Statistical Supplement for 2024, around 63% of 50.1 million retired workers opted for reduced benefits by claiming before reaching FRA, which varies between 66 to 67 years based on birth year. On the flip side, delaying benefits until age 70 can significantly raise monthly payments through delayed retirement credits.

However, for some individuals, taking benefits earlier may be justified, especially if they face health issues or financial burdens. It’s essential to carefully weigh the pros and cons of immediate payments against the potential for larger lifetime benefits.

2. Overlooking the Earnings Limit

If you claim Social Security before reaching FRA and continue working, you may encounter an annual earnings limit that can reduce or withhold your benefits. For 2024, this limit stands at $22,320. In 2025, it will rise to $23,400. For every $2 earned above this threshold, $1 in benefits is withheld.

Once you reach FRA, the limits shift. In 2024, the earnings cap increases to $59,520, and to $62,160 in 2025. At this stage, the rule changes to $1 withheld for every $3 earned above the limit. After FRA, the earnings cap disappears, and any previously withheld benefits are recalculated to include those amounts.

3. Misunderstanding Spousal and Survivor Benefits

Spousal and survivor benefits offer significant financial support, yet many individuals miss out due to a lack of understanding. A spouse can claim up to 50% of their partner’s FRA benefit at their own FRA. Additionally, survivor benefits allow a surviving spouse to take either their benefit or that of the deceased spouse, whichever is higher.

Timing is crucial; claiming spousal benefits before FRA results in a reduced amount. Furthermore, if a widow or widower remarries before age 60, they typically lose the right to claim survivor benefits on their deceased spouse’s record. Proper coordination of these benefits within a retirement plan can substantially enhance household income, particularly for two-income families.

4. Failing to Review Your Earnings Record

A woman looking up how to maximize her retirement benefits.

The Social Security Administration bases benefit calculations on individuals’ 35 highest-earning years. Inaccuracies in your earnings record could lead to lower benefits. Regularly reviewing your record through your mySocialSecurity account can help you identify errors, such as unreported income, ensuring corrections can be made before retirement.

If you worked less than 35 years, missing years are counted as zeros, further decreasing the benefit. Working additional years to replace low-earning years can help improve your average, leading to higher monthly payments. Keeping an accurate earnings history is a straightforward method to maximize your benefits.

5. Overlooking the Tax Implications of Benefits

Social Security benefits may be subject to federal income tax, depending on your combined income, which includes adjusted gross income (AGI), non-taxable interest, and half of your benefits.

For individuals with a combined income over $25,000, or couples over $32,000, up to 50% of benefits may become taxable. For higher income brackets—over $34,000 for singles or $44,000 for couples—up to 85% of benefits could be taxable.

Failing to consider these tax implications can lead to unplanned financial strain. Employing strategies to manage taxable income, such as utilizing Roth IRA withdrawals, could lessen the burden on your retirement benefits.

6. Misjudging the Impact of Medicare Premiums

Medicare premiums can significantly affect Social Security benefits. Typically, Medicare Part B premiums are deducted directly from Social Security payments, with the premium set at $174.70 per month in 2024, rising to $185 in 2025.

High-income retirees may incur additional costs through income-related monthly adjustment amounts (IRMAA), which increase Medicare premiums tied to modified adjusted gross income (MAGI). Understanding these deductions can help retirees manage their overall cash flow and avoid unexpected expenses.

7. Ignoring the Impact of Divorce

Divorced individuals may qualify for spousal or survivor benefits based on their ex-spouse’s earnings, provided their marriage lasted at least 10 years. Importantly, these benefits do not alter the ex-spouse’s payments and can be a key income source during retirement.

However, if individuals do not apply for these benefits or misunderstand their eligibility, they may miss out on valuable financial support. For instance, benefits must be claimed by individuals who have not remarried.

Bottom Line

A woman reviewing her Social Security benefits.

Maximizing Social Security benefits involves comprehending how timing, income, taxes, and eligibility affect your payments. Thoughtful planning can avoid pitfalls like early claiming, ignoring tax implications, or mishandling spousal benefits. Regularly staying informed and reviewing your options can guide your decisions to better align with your retirement objectives and financial requirements.

Retirement Planning Tips

  • A financial advisor can assist you in determining the optimal time to claim Social Security and address factors that can maximize your benefits. Discovering a financial advisor is easier than you might think. Use SmartAsset’s free tool to connect with up to three vetted advisors in your area and schedule a free introductory call to find the right fit for your needs.
  • SmartAsset’s Social Security calculator can help you project your future monthly benefits.

Photo credit: ©iStock.com/vitapix, ©iStock.com/photoman, ©iStock.com/Prostock-Studio

The post 7 Mistakes That Can Mess Up Your Social Security Benefits appeared first on SmartReads by SmartAsset.

The views and opinions expressed herein are those of the author and do not necessarily reflect those of Nasdaq, Inc.

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