A whopping 70 percent of Americans fail to maximize their Social Security benefits, in most cases because they fall prey to one of the eight basic missteps below. Don’t be one of them.
Failing to Coordinate Spousal Benefits: Too often couples focus on only their own Social Security and fail to recognize that they may be eligible to receive up to 50 percent of their spouse’s benefit while waiting to claim their own benefits. Missing these benefits often costs a couple $40,000 to $50,000 in lost Social Security income. Also, filing the wrong type of application or filing at the wrong time can cost you dearly.
Not Maximizing Survivor Benefits: Again, teamwork is important. Since the Social Security benefit of the higher-earning spouse is “inherited” by the surviving spouse, pursuing a strategy that increases the survivor benefit as much as possible can make a significant difference. Many couples miss another $70,000 to $80,000 by failing to maximize the survivor benefit. The higher-earning spouse should be especially careful about when to claim Social Security benefits.
Working a Minimum of 35 Years: Social Security is based on your highest 35 years of earnings history. Continuing to work in retirement can be one of the best ways to increase your Social Security benefits, especially for married couples. Each additional year of current earnings from work that replaces a lower earning year will increase your (and potentially your spouse’s) Social Security. If you have less than 35 years of earnings, the non-working years will be counted as “0” and will lower your overall Social Security benefit vs. having worked at least 35 years.
Claiming Early: If you’ve just turned 62 and want to claim your benefits, hold on. This is by far the single biggest mistake that most Americans make. Many believe that Social Security is almost an “automatic” benefit: turn 62, collect and don’t think about it again. Avoid this path if you want to maximize your benefits. If you already claimed your benefits early, all is not lost. You can suspend those benefits and minimize the damage by reinstating benefits when you turn 70. Also, if you’re within one year of your original filing date, there are ways to withdraw your application and start over.
If you do delay benefits, you receive what are called Delayed Retirement Credits (DRCs), which accumulate at a substantial rate — 8 percent per year between 66 and 70. Claiming at 70 vs. 62 means you’ll receive 176 percent of what you would have received at 62 for the rest of your life, and your spouse can benefit from your DRCs as well.
Earning Too Much While Collecting Benefits: Another frequent stumbling block is the Earnings Test, which applies to those who claim Social Security benefits prior to their Full Retirement Age (66 for most people) and are still working and earning an income.
Earning more than $16,920 in 2017 while collecting a Social Security benefit will cause the Social Security Administration to withhold $1 for every $2 in earnings over the Earnings Limit. While this money is not technically lost (the Social Security Administration credits it to your account at your Full Retirement Age), claiming early and having benefits withheld can present two major problems: 1) Benefits will be withheld so you will not receive all the benefits (if any) anticipated as the result of claiming, and 2) Claiming early (even if you’re not receiving a benefit because it’s being withheld) will still lock you into the early claim date which means a suboptimal Social Security strategy and less money.
Ignoring the Impact of Taxes: Social Security benefits are taxable are considered income by the IRS and must be included on your annual tax return. Without proper planning, taxation can reduce Social Security benefits by up to 30 percent in some cases. This is called the Social Security Tax Torpedo and should be avoided whenever possible. Whether or not your Social Security income is subject to taxation depends on the level of your Provisional Income, defined as follows:
Provisional Income =Adjusted Gross Income + Tax-Exempt Interest + 50 percent of Your Social Security Benefits
Having Errors in Your Social Security Earnings Record: You want to get credit for all your hard work, right? Well, make sure that you check your earnings record with the Social Security Administration on your Social Security statement. If there are errors in your earnings record, you won’t receive all of the benefits that you have earned. You have 3 years, 3 months and 15 days to correct any erros. After that, it’s too late.
Falling into a ‘Rat Holes’: The Social Security increases that accumulate between the ages of 62 and 70 do not accumulate evenly, which creates what are called “Social Security Rat Holes” for those that are single. These are suboptimal times to claim your benefit based on the formula that is used to calculate what Social Security will pay you. For those born between 1943 and 1954, one rat hole occurs between 62 years and 63 years and 11 months. The other occurs between 65 and 4 months and 66 and eight months. In other words, the “Full Retirement Age” as listed on your Social Security statement is directly in one of these rat holes!