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Receiving your Social Security benefits can be an important part of the retirement planning process. That said, there are a lot of nuances, rules and regulations, often hidden in the fine print. It’s easy to make or fail to make choices that can hurt your Social Security check in ways big and small.
Here are some common mistakes retirees make with their Social Security checks. Know them, so you can hopefully avoid them.
1. Taking profits too early
Many retirees decide to begin collecting Social Security benefits as soon as they reach the minimum age of 62, often without fully understanding the long-term effects of early benefits.
“Claiming benefits early can permanently reduce monthly payments,” said Christopher Stroup, certified financial planner (CFP) and owner of Silicon Beach Financial. “Claiming your benefits at age 62 can reduce benefits by 25% to 30% compared to waiting until full retirement age.”
Also, for example, just because you postponed taking it at age 62 doesn’t mean you have to wait until age 67. You can take it any time in between and get the pro-rata amount.
2. Not understanding time
A concerning aspect of this is not understanding the time lag between when you file and when you first start receiving your checks, according to Patrick Ray, senior vice president of Wealth Enhancement Group.
The Social Security Administration (SSA) gives people about three months from application to receiving their first check. Ray explained that he works with many retirees who leave their paychecks at retirement, meaning they are no longer getting a pay check, and often misjudge when they will get their first check.
“So, if someone decides to retire in June, they should probably start the process in April because it doesn’t happen overnight.”
3. Not taking into account the benefits of your spouse
Some retirees overlook potential benefits that may be available through spousal claims, Stroup said.
“One spouse can claim benefits based on his or her own earnings record or can claim up to 50% of the other spouse’s benefits if it is higher. For couples where one spouse earns significantly more, failing to be strategic about spousal benefits may result in missed opportunities,” he explained.
4. Not understanding the tax implications
A big common mistake retirees make is not realizing that Social Security benefits may be taxable depending on the retiree’s total income. “Many retirees forget to factor in how their Social Security income will be taxed, which can impact their retirement income strategy,” Stroup said.
Ray agreed, saying, “People don’t realize that their Social Security (taxes) cover anywhere between 15% and 85% of their benefits, depending on what their household adjusted gross income is. So, it becomes an interesting discussion when someone finds out that their tax responsibility is less because they didn’t deduct enough or they don’t withhold anything,” he said.
That’s why it’s important to talk to a tax or financial advisor before taking Social Security, Ray said.
5. Not being aware of the impact on retirement funds
Another mistake, Ray said, is a lack of understanding how Social Security benefits affect their other retirement assets.
“If the plan was to reduce what they take out of their retirement money to otherwise coordinate with their need for monthly cash flow, then many people use Social Security as an extra buffer of extra money that suddenly comes to them, when in reality, it makes a lot of sense to consider reducing what they take out of their retirement assets.”
6. Not planning
Most of these mistakes can be attributed to not planning properly and far enough in advance, Ray said. “The moral of the story is plan, plan, plan. You can never have enough time to properly plan for what is best for you and your family. That’s the lesson.”
He shared that 74% of people above the age of 50 do not have any written financial plan.
7. Overestimating income
Another common mistake Ray sees in his clients is that people think they will have more money to spend in retirement because of Social Security than they did while they were working.
“It boils down to planning, projecting, and budgeting all aspects of retirement so you’re prepared for changes accordingly. Running financial projections is a big deal.”
8. Not planning for life expectancy
Many people don’t consider how long they will live and how many years they will actually need the money in retirement, Ray said. He considers this another aspect of bad planning.
“If all the men in your family have died before age 75, it’s reasonable to assume you won’t make it past age 75. But that doesn’t mean you shouldn’t do financial projections to see what it would look like if you live to 85 or 90 and other thought processes that fall in line.” Not doing this means you risk running out of money because you live too long.
Most of these mistakes can be avoided with thoughtful planning and the help of a financial advisor.
Kaitlyn Moorehead Contributed to the reporting of this article.