5 Major Social Security Mistakes Boomers Can’t Stop Making
Written by
G. Brian Davis
Edited by
Levi Leidy
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Retirement planning is both complicated and high-stakes — a recipe for mistakes with major financial consequences. And sure enough, Business Insider reported that more than half of Americans over 65 earn less than $30,000 a year.
As you plan your own retirement, watch out for these Social Security mistakes plaguing current baby boomers.
Taking Social Security Too Early
Too many people reach their early 60s and think: “I’ve been paying into the system for decades, I need to lock in my share!” Unfortunately, that leaves them with far lower lifetime benefits than if they’d waited.
“Filing early means locking in a permanent reduction in benefits, up to 30% if your full retirement age is 67,” explained Christine M. Parisi, senior wealth advisor at R.W. Rogé & Company.
If you take benefits at age 62, you receive just 70% of your full retirement benefit. At 67, you collect 100%. Wait until 70, and you receive 124% of your full Social Security benefit.
Combining Benefits With Continued Work
Plan to continue working for a while? Hold off on taking Social Security — and not just to secure higher benefits.
“If your earnings exceed the annual limit, the Social Security Administration may withhold $1 in benefits for every $2 you earn over the threshold,” Parisi added. “Benefits can also push your income higher for Medicare-related costs like IRMAA, meaning you could end up paying more in premiums.”
Plus, combining your salary with Social Security can push you into a higher tax bracket. You can end up handing much of that money right back to Uncle Sam.
Failing To Plan Spousal Benefits
If one spouse earned significantly higher income, or worked for many years longer, their benefits will be higher. Plan to optimize those, perhaps by having that spouse delay benefits while the family lives on earned income or distributions from retirement accounts before taking benefits.
Parisi noted that different rules apply to surviving spouses. “If your late spouse worked long enough to qualify for Social Security, you may be able to start collecting survivor benefits as early as age 60. Unfortunately, many don’t realize this is even an option until it’s too late.”
Poor Tax Planning
First and foremost, when you planned your retirement income, did you account for taxes? You’ll still owe income taxes in retirement, at least under current tax laws.
“A portion of Social Security benefits are taxable, up to 85%, based on your provisional income,” said Keith Hensley of Florida Financial Planning. Many states tax Social Security benefits as well.
The upshot? You may need more money saved for retirement than you thought. Again, you may be better off working another year and delaying Social Security benefits.
It may not be too late for a Roth conversion to make sense. If you have a year with lower income, consider taking the tax hit and converting some of your traditional retirement funds to Roth accounts, so they can compound tax-free and you can avoid paying taxes on withdrawals in retirement.
Assuming Social Security Alone Will Be Enough
If Social Security is your only — or your primary — plan for retirement income, expect stormy seas ahead.
William Connor, CFA and CFP with Sax Wealth Advisors, added some historical context. “Social Security was created as a safety net for older Americans. It was not designed as a primary source of retirement income, and won’t replace your working income.”
Instead, combine it with other sources of income such as retirement accounts, health savings accounts (HSAs), taxable brokerage accounts, real estate investments and perhaps part-time fun working gigs. The less you rely on Social Security income, the more comfortable and secure your retirement will be.
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