Claiming Social Security benefits is a complex process that can have a significant impact on your financial future. One couple learned this the hard way when they lost out on $3,346 per month in benefits due to some common mistakes. This serves as a cautionary tale for others who may be considering their Social Security options.
The couple in question chose to claim their Social Security benefits at the age of 62, which locked in a monthly benefit of $2,209 each, totaling $4,418 together. However, as the COVID-19 pandemic unfolded and inflation increased, they realized that this amount was not sufficient to meet their needs. They sought advice on how to increase their benefit, but unfortunately, once they claimed their benefits, they were locked into that level for life. The only increases they would receive were through cost-of-living adjustments (COLA).
If the couple had waited until their full retirement age of 67, they would have locked in a higher monthly benefit of $3,882 each, totaling $7,764 together, subject to COLA increases in the future. The difference between what they locked in five years ago and what they could have received if they had waited is a staggering $3,346 per month. Over the course of their retirement, this amounts to a significant loss of potential income.
While the couple had already received benefits for five years, it would have taken less than seven years of receiving benefits at the full retirement age amount to close the gap. From approximately the age of 74 onward, they would have received an extra $3,346 per month, greatly improving their financial situation.
According to Chris Orestis, president of Retirement Genius, the decision of when to claim Social Security benefits is influenced by factors such as health and financial need. However, if individuals can afford to wait and have a reasonable life expectancy, delaying claiming can be a wise financial move.
Another common mistake people make when it comes to Social Security benefits is failing to maximize their benefits based on their spouse’s record. This is especially applicable to divorced individuals and those who have lost a spouse. Social Security retirement benefits allow individuals to claim a higher amount based on their spouse’s work history, but specific requirements must be met.
For example, to claim a higher spousal benefit amount, individuals must have been married for at least 10 years and not have remarried. In the case of a deceased spouse, survivors may be eligible to apply for benefits and receive up to 100% of their late spouse’s Social Security benefit, depending on factors such as their own age.
Unfortunately, many people miss out on these benefits by not understanding the rules or filing incorrectly. This oversight can result in a significant loss of money that could have been received through spousal or survivor benefits.
Additionally, individuals must be mindful of income taxes on Social Security benefits. Around 40% of Americans pay federal income taxes on a portion of their Social Security benefits, with the taxable amount dependent on their income. It’s essential to account for these taxes when calculating the net benefit individuals can expect to receive.
Some individuals are surprised when they begin collecting Social Security benefits, only to receive a notice from the Social Security Administration stating that their benefits will be reduced due to income taxes. This sudden reduction can have a significant impact on their financial situation.
While it is possible to work and collect Social Security benefits simultaneously, it’s crucial to consider the tax implications. Individuals should carefully assess whether it is worth working and potentially having their benefits taxed, as this may impact the overall financial benefit of continuing to work.
To avoid these and other common Social Security mistakes, it is crucial to take the time to understand the intricacies of the system. Fortunately, there are resources available to help individuals navigate the process and make informed decisions about their benefits.
Local Social Security offices can provide valuable guidance and help individuals run the numbers to determine the best course of action. By seeking advice directly from the source, individuals can ensure they are maximizing their benefits and making informed choices about their financial future.
In conclusion, claiming Social Security benefits is not a one-size-fits-all decision. There are various factors that can affect the amount individuals receive, including their age at claiming, spousal benefits, and income taxes. By understanding these variables and seeking guidance from reliable sources, individuals can avoid costly mistakes and maximize their Social Security benefits to secure a more financially secure retirement.
