3 Common Mistakes People Make When Claiming Social Security
By: Margaret Nickens
Social Security helps many Americans fund their retirement, but sorting through all of the different claiming strategies and rules can be challenging. Retirees may end up claiming their Social Security benefits too early or claiming in a manner that doesn’t best meet their family’s needs. With that in mind, I encourage you to read about and work to avoid these three common claiming mistakes.
Mistake #1: Not Considering Your Life Expectancy
When I begin to develop a financial plan for a client, I will often ask them how long their parents or grandparents lived. This question can help a client estimate their life expectancy. If many of your relatives lived longer, you should plan for a longer life expectancy. Those with longer life expectancies may find that claiming Social Security later in life is most beneficial to them.
Why is this the case? Claiming benefits at the earliest possible age (age 62) means that your benefit will be permanently reduced, sometimes by up to 30%. Those with longer life expectancies could accordingly miss out on thousands of dollars in benefits by claiming a reduced benefit. You could instead wait until your “full retirement age” (FRA) and receive 100% of your earned benefits. Even better, you could claim after your FRA and receive an 8% annual increase to your benefit until you reach the age of 70.
Comparatively, if you are experiencing illness or have many family members who had shorter lifespans, claiming earlier may be in your best interest. Doing so would allow you to take advantage of the benefits that you’ve earned.
I encourage you to sign up for a My Social Security account at www.ssa.gov/myaccount in order to better understand the size of your benefit should you claim at various ages.
Mistake #2: Not Understanding Social Security Basics
Many people do not understand the rules of Social Security and thus develop a claiming strategy without understanding the full picture.
Before deciding on the best age to claim, you should consider:
- Your Marital Status: Spouses should develop a joint Social Security claiming strategy that would maximize their joint income. Spouses should also consider what would happen if one spouse were to be widowed. When one spouse passes, the smaller benefit disappears. The surviving spouse will continue to receive the higher Social Security benefit. With that in mind, the spouse who is the higher-earner could consider delaying claiming their benefit to ensure that the survivor’s benefit is as large as possible.
- If you plan to work after claiming: Your benefits could be reduced if you work after claiming. If you claim before reaching FRA, your benefit will be reduced by $1 for every $2 you earn above the annual earnings threshold. In 2021, the threshold is $18,960. Once you reach your FRA, this threshold increases before disappearing completely.
- Your tax liability: The IRS calculates your provisional income each year to determine if you owe taxes on your benefits. With that in mind, it’s important to develop tax strategies for your benefits, especially if you’re pulling funds from a tax-deferred retirement account as well.
- The possibility of a do-over: You have the option to withdraw your claiming application within 12 months of submitting it. You can only do this once, and you must repay all benefits received in the interim.
Mistake #3: Not Developing a Comprehensive Retirement Income Strategy
Many people use their retirement assets to generate additional income in retirement. With that in mind, make sure your claiming strategy accounts for all of your retirement assets and income sources. When doing so, work to ensure that you aren’t withdrawing more than 4% of each retirement account’s principal each year. As I mentioned above, you should consider your tax liability from your different retirement income sources. You should also think about how much money you want to leave to your heirs.
With so many possible considerations, I encourage you to reach out and set up a financial planning consultation with Elm3. We can help you develop a comprehensive retirement plan and determine the best Social Security claiming strategy for you and your family.