For many Americans, Social Security is their biggest retirement asset. The various mistakes people make when managing their Social Security benefits can cost them dearly. You worked hard for decades to accumulate your Social Security retirement benefits, take the time to optimize your benefits.
For typical American households, the lifetime value of their Social Security benefits will dwarf the equity in their homes or retirement account balances. Even for higher income (and net worth) families, Social Security retirement benefits are an essential part of their retirement plans.
Here are five of the biggest mistakes Americans make when it comes to getting the maximum Social Security benefits:
1. Filing Earlier Than Necessary
The offer of a check (or direct deposit) from the government each month is just too much for many Americans to resist. But claiming Social Security too early can dramatically decrease your lifetime Social Security benefit. More importantly, it will leave you less money later in life, when options to earn money are more limited.
Think of Social Security as longevity insurance. That is, Social Security essentially offers protection against running out of money as we age. If you claim Social Security at age 70 instead of 62 (the earliest possible claiming age), your monthly benefit will rise at least 76%. Furthermore, your Social Security cost of living adjustments can increase benefits further.
2. Claiming Early and Still Working
When you claim Social Security benefits before Jan. 1 of the year, you reach full retirement age (currently around 67) and earn more than $18,960 in 2021; the government will reduce your benefit by $1 for every $2 of income in excess of that amount. This often surprises people who are still working and claiming Social Security benefits.
The good news here is that in most cases, you will eventually get the money back. In the future, the government will adjust your benefits upward once you have reached full retirement age.
STUDIO CITY, CA – JANUARY 16: Actress Betty White poses at the celebration of her 93rd birthday on … [+]
Getty Images for TV Land
3. Not Maximizing Survivor Benefits
I get it; when you become a widow or widower, the last thing you want to think about is maximizing your Social Security benefits over your lifetime. But Social Security planning is even more important when one spouse has died.
Let’s suppose you and your spouse both worked, and you are widowed young. You can file for Social Security survivor benefits at the ripe old age of 60. This is years earlier than the minimum eligibility age for standard Social Security benefits. Taking the survivor benefit will allow your own benefits to grow until you reach the age of 70. At that point, you would switch from the survivor’s benefit to your own personal Social Security benefits, assuming your benefits are larger.
If your Social Security benefits are smaller, you can do the reverse. You would file for your own SS benefits at the minimum age of 62 and let the survivor’s benefit grow until it peaks. At that point, you can switch to the bigger benefit in most cases.
Many widows or widowers are not even aware that this strategy is an option. Therefore, they fail to use it. This could be costing the surviving spouse ten years of benefits.
I know this can be stressful and confusing; if you are widowed, reach out to a fiduciary certified financial planner™ to help maximize your Social Security benefits and minimize taxes on your inherited assets. A larger Social Security benefit can help give you more time before you begin withdrawals from your Inherited IRA or other inherited assets.
Getting married or divorced near retirement can change you future social security benefits.
getty
4. Getting Divorced Too Soon or Remarrying
I am not trying to give marriage or divorce advice here. All the same, getting divorced can destroy even the best-laid retirement and Social Security maximization strategies.
For those who have been married for less than ten years, you usually will not be entitled to a SS spousal benefit if you divorce. In any case, this could be a substantial amount of money, especially if one spouse did not work.
For divorcees who do qualify for spousal benefits from their ex, remarrying may lower future SS benefits. When remarrying, you will be giving up your spousal benefits from your previous marriage. If that benefit would be larger than the benefits you will receive when remarrying, well, you should take that into consideration.
5. Ignoring Social Security Taxation
Many Americans seem to be unaware that Social Security benefits may be subject to federal income tax. The amount of taxes owed will ultimately depend on your overall income levels. You don’t have to be rich for your Social Security benefits to be taxed.