Social Security has been a cornerstone of retirement planning for nearly 90 years, providing financial stability to millions of Americans. However, despite its long history, many individuals remain unaware of key aspects of the program, leading to common mistakes that can significantly impact their financial future. According to a recent survey by Nationwide Financial, nearly half of Americans (49%) don’t know how to maximize their Social Security benefits.
If you’re unsure about your Full Retirement Age (FRA), when to claim your benefits, or how to optimize your Social Security payments, you may risk missing out on financial opportunities that can help secure your retirement. This guide outlines several common mistakes people make when claiming their Social Security benefits and how to avoid them.
1. Miscalculating Your Full Retirement Age (FRA)
Your Full Retirement Age (FRA) is the age at which you’re entitled to receive 100% of your Social Security benefits. FRA depends on your birth year and ranges from 66 to 67 years for most Americans. Knowing your FRA is critical because claiming benefits before reaching this age results in a permanent reduction in your monthly payments. On the other hand, delaying benefits beyond FRA can increase your monthly payout until you reach age 70.
If you were born between 1943 and 1954, your FRA is 66 years. For those born in 1960 or later, FRA is 67 years. The Social Security Administration (SSA) determines your FRA based on your birth year and earnings history, averaging your highest 35 years of income. If you worked fewer than 35 years, the SSA will factor in zero earnings for the missing years, reducing your benefits.
Additionally, if you were born on the first day of a month, the SSA considers you born in the previous month for calculating your FRA. For example, someone born on March 1 is treated as if they were born in February.
2. Claiming Benefits Too Early
You can begin claiming Social Security benefits as early as age 62, but doing so comes at a cost. Early claims result in a permanent reduction in your monthly payments.
For example:
If your FRA is 67, claiming at 62 reduces your benefit by 30%. For spousal benefits, the reduction can be as high as 35%. For the first 36 months before FRA, Benefits are reduced by 5/9 of 1% per month (or 6.67% per year). For additional months beyond 36 months, Benefits are reduced by 5/12 of 1% per month (or 5% per year).
While early benefits might seem appealing, the lifelong reduction in payments means you could lose out on tens of thousands of dollars over time. Conversely, delaying benefits until age 70 increases your payments, thanks to delayed retirement credits.
Overlooking Life Expectancy When Claiming Benefits
Deciding when to claim Social Security benefits is a personal decision influenced by factors like life expectancy, financial resources, and health. While delaying benefits maximizes your monthly payments, it may not always be the best choice if you have health concerns or need the money sooner.
For example, If you expect to live a long life, delaying benefits until age 70 can provide the highest lifetime payout. If you face health challenges or require additional income immediately, claiming benefits earlier might be more practical.
Having alternative income sources, such as a pension or investment portfolio, can provide flexibility in deciding when to claim Social Security benefits. However, for those relying solely on Social Security, careful planning is essential to make the most of their benefits.
4. Ignoring the Basics of Social Security
Misunderstanding Social Security’s rules and claiming strategies can lead to significant financial losses. Key factors to consider include:
Full Retirement Age (FRA)
Claiming benefits before FRA results in a permanent reduction, while delaying benefits beyond FRA increases your monthly payments. Knowing your FRA is crucial for making informed decisions.
Early Retirement Age
Although benefits are available at age 62, early claims come with a permanent reduction. Additionally, if you continue working while claiming early benefits, your payments may be temporarily reduced based on your income.
Delayed Retirement Credits
If you delay claiming benefits past FRA, your payments will increase by 8% per year until age 70. However, there’s no benefit to delaying beyond age 70.
Survey Insights: What Americans Know (and Don’t Know) About Social Security
The Nationwide Financial survey revealed several key findings:
- 49% of Americans don’t know how to maximize their Social Security benefits.
- 33% are unsure about the age at which they’re eligible for full retirement benefits.
- Nearly 40% don’t know how much their future monthly payment will be.
- Over 75% worry that Social Security will run out of money during their lifetime.
- Only two in five Americans consult financial professionals for advice on when to claim benefits.
These statistics underscore the importance of education and planning when it comes to Social Security.
5.Failing to Consult a Financial Advisor
Working with a financial advisor can help you navigate the complexities of Social Security and develop a tailored strategy for maximizing your benefits. Advisors can provide insights into When to claim benefits, How to coordinate spousal benefits, Tax implications of Social Security income.
The Future of Social Security: Uncertainty Ahead While Social Security is not going bankrupt, the program faces funding challenges. Nearly three-quarters of Americans worry about the program’s solvency, with concerns that it may run out of money by the mid-2030s. If Congress doesn’t act, future beneficiaries could see reduced payments.
Understand your FRA and how early or delayed claims affect your payments. Consider life expectancy and personal circumstances when deciding when to claim benefits. Stay informed about Social Security rules and changes to the program.
Work with a financial professional to develop a comprehensive retirement strategy.
By educating yourself and planning carefully, you can make the most of your Social Security benefits and achieve your retirement goals.
