6 Mistakes That Could Cost You Thousands in Social Security (and How To Avoid Them)
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Parsing the rules around Social Security can be tricky. As you plan when and how to take Social Security in your golden years, you might feel like you’re walking a tightrope — one misstep could send you tumbling into an uncertain financial future where you could lose thousands of dollars.
Instead of walking that tightrope alone, you need an expert guide. GOBankingRates found just the right one in Kim Gattis, CFP, senior vice president and manager of Financial Planning and Private Wealth at UMB Bank. As part of our Top 100 Money Experts series, she’s here to help you avoid the most common — and costliest — Social Security mistakes, and explain what to do instead.
1. Claiming Early While Still Working Without Understanding the Earnings Test
The first thing Gattis points out is that the decision about when to start receiving Social Security is far from one-size-fits-all. Many factors come into play, such as other income sources, spousal benefits, lifestyle needs, and health and longevity considerations.
Generally, if you start at the minimum age of 62, you’ll receive smaller payments over a potentially longer period. But if you wait until you reach full retirement age (FRA) — 66 or 67, depending on your birth year — you’ll get larger monthly checks for life.
You might think you’d be better off collecting Social Security before you reach FRA while still working. However, that’s not always true. Gattis says your benefits can be temporarily reduced depending on how much you earn.
“While these benefits will be repaid through higher monthly payments once you reach FRA, many people don’t know they may not be receiving their entire Social Security monthly benefit if they have other earned income,” she said.
How to Avoid It: Be aware that if you claim early while still working, your benefits may be reduced under the earnings test. Though they’re recalculated at FRA, you could still forfeit thousands in the short term.
2. Delaying Benefits Without Considering Your Overall Financial Picture
Many people assume waiting until age 70 to collect Social Security is the wisest choice since delaying increases monthly payments.
However, if you drain your other retirement accounts to cover living expenses during the delay period, you could lose the growth potential of those investments.
“While waiting until age 70 to claim your benefits will increase your monthly payment amount, it’s also important to think about the amount you’ll be using from your retirement savings during that time and how the growth potential of funds left in those accounts may offset waiting for a higher Social Security benefit,” said Gattis.
How to Avoid It: Before delaying, run the numbers. Determine whether the higher Social Security payment actually makes up for the investment growth you’re sacrificing by tapping into your retirement accounts early. Sometimes, claiming sooner can make more sense.
3. Over-Relying on Social Security and Under-Spending Retirement Savings
Another common mistake Gattis often sees involves people mentally segmenting their retirement income into separate “buckets.” They’re usually more willing to spend Social Security income and hesitant to withdraw funds from other retirement savings.
“This, in turn, will sometimes cause clients to reduce spending and lifestyle choices they could maintain while delaying Social Security benefits,” she said.
In essence, people are depriving themselves of valuable life experiences because they’re so focused on delaying Social Security benefits — the “bucket” they’re more willing to spend from.
How to Avoid It: Don’t separate your retirement income into distinct buckets. Instead, view your income holistically — and don’t be afraid to enjoy what you’ve earned, within reason.
4. Not Checking Your Earnings Records for Errors
Everyone makes mistakes — even the Social Security Administration. And if it miscalculates your earnings, you could lose money every month for the rest of your life.
“Everyone should check their earnings history with the Social Security Administration to ensure their earnings are correct,” said Gattis. “Social Security benefits are based on your highest 35 years of earnings and vary depending on how much you earn and when you choose to start benefits.”
How to Avoid It: Before you file for Social Security, review your earnings record through your “my Social Security” account at SSA.gov. Correct any errors as soon as possible — it could mean a higher benefit.
5. Missing Out on New Benefits Under the Social Security Fairness Act
You may have heard about the recently passed Social Security Fairness Act. Some provisions in this law mean that certain people with pensions now qualify for Social Security benefits they didn’t previously, based on their own or a spouse’s earnings records.
Not understanding recent changes to the Windfall Elimination Provision (WEP) and Government Pension Offset (GPO) could potentially mean depriving yourself of income.
“If someone did not file for benefits because they knew they would not receive benefits due to the WEP/GPO provision, then they now need to file an application with the Social Security Administration,” said Gattis.
How to Avoid It: If you have a pension and were previously impacted by WEP or GPO, file a new application with the Social Security Administration.
6. Deciding When To File Without Consulting an Expert
Deciding when to file for Social Security is one of the most complex — and consequential — financial decisions you’ll make. Without expert guidance, you could end up losing thousands of dollars over your retirement.
“Work with your financial advisor and team, and do your homework prior to filing to ensure you understand all the benefits you’re entitled to and the rules around those benefits,” Gattis said. “The Social Security Administration website has many helpful tools and information, and your financial planner can use software programs to illustrate your options and help you reach the optimal decision.”
How to Avoid It: Don’t go it alone. Consult a financial advisor who understands Social Security optimization and can guide you through this highly personal decision. The right plan can make a meaningful difference in your retirement income.
This article is part of GOBankingRates’ Top 100 Money Experts series, where we spotlight expert answers to the biggest financial questions Americans are asking. Have a question of your own? Share it on our hub — and you’ll be entered for a chance to win $500.
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