It’s important to avoid costly Social Security retirement mistakes. Many retirees count on Social Security retirement benefits to pay for the basic needs of life. Social Security retirement benefits are included by millions of Americans as an essential component. Without Social Security retirement benefits, millions of workers might not have the ability to retire at all.
Unfortunately, many currently retired and soon to retiree people don’t plan for future financial needs. They make avoidable and costly retirement benefit mistakes. By taking a moment to consider the pitfalls, it’s possible to keep more money for a new beginning in retirement. Claiming Social Security retirement benefits too soon, preparing to retire before reaching Social Security Full Retirement Age (FRA), and failure to diversify retirement income sources are just a few areas to consider now.
Don’t Claim Social Security Retirement Benefits Too Soon
The decision about when to claim Social Security retirement benefits is quite simple. Social Security Administration (SSA) shows beneficiaries the benefits of waiting to Full Retirement Age (FRA) at a minimum and age 70 at the maximum. Create a My Social Security Account to review earnings and taxes at least once each year.
However, making the decision to wait to claim Social Security benefits isn’t the best choice for everyone:
Poor physical health is a logical reason to claim early retirement of Social Security benefits. If the beneficiary doesn’t believe a long life expectancy is in the cards, it’s probably a good idea to claim benefits earlier to have more money over a shorter life span.
Financial health status may be another prompt to claim early Social Security retirement benefits. If claiming retirement benefits before FRA keeps food on the table, it’s the right decision.
These dire scenarios don’t apply to most Social Security retirement beneficiaries. If he or she reaches FRA at age 67 and makes the decision to take early retirement at 62, the financial loss is immediate and lasting. According to SSA, early retirement benefits are about 30 percent less than retirement benefits at full retirement age.
When possible, future retirees should wait to claim Social Security retirement benefits as long as possible. For each year he or she waits—up to age 70—Social Security adds a credit. If the retiree waits to age 70, he or she can increase the Social Security monthly retirement benefit by about 32 percent. That’s an especially meaningful return in today’s low yield environment.
Many people who plan to claim Social Security early retirement believe they can get a part-time job or project work to round out the bank balance. Unfortunately, if the newly retired person earns above the earned income threshold—or greater than USD 15,720 this year—his or her Social Security retirement benefits will be decreased by a dollar for every two dollars earned above the limit:
Earned income can reduce the annual Social Security benefit by thousands of dollars.
SSA doesn’t reduce monthly benefit checks by a small amount to account for increased earnings. The overage is deducted immediately.
If the average retiree earns USD 1,500 in monthly benefits (USD 18,000 a year), SSA doesn’t reduce the monthly benefit payment to USD 1,000 per month. SSA may opt to stop Social Security retirement payments at once for four months in this example to compensate for earned income above the annual limit.
This example is just one of the reasons to avoid costly early retirement.
Preparing to Retire before Full Retirement Age
Many U.S. workers assume that full retirement age is still 65. It’s important for every Social Security beneficiary to know his or her FRA. FRA is fixed according to the beneficiary’s birth year. Review the FRA chart at SSA.gov to learn more about Social Security Full Retirement Age.
Older Americans, born before 1937, reached FRA at age 65. Those born in 1942 reached FRA at 65 years plus 10 months. For Baby Boomers born before 1960, FRA is age 66. Those born in 1960 or later years, FRA is 67 years.
It’s also important to know that factors like beneficiary FRA may change in the future:
SSA continues to struggle with the number of new workers paying Social Security tax vs. the numbers of current and about-to-retire Social Security beneficiaries.
Retirees are living longer today than ever before. This fact means SSA’s Trust Fund faces depletion. Congress must act now to help SSA accomplish its important financial mission.
Increasing FRA or decreasing benefits could help SSA’s solvency. Alternatively, increasing Social Security tax rates on wealthy taxpayers could also improve SSA’s ability to fund older Americans, survivors, and disabled persons in the future.
Plan to retire at FRA or up to age 70. Age 65 is no longer Social Security full retirement age for most Americans.
Diversity Sources of Retirement Income
Social Security’s architects never imagined that anyone would rely on Social Security retirement benefits to fund the golden years. It’s intended to provide about half of the beneficiary’s monthly income needs in retirement. Failing to plan for additional retirement income is a costly and avoidable mistake:
Let’s say that, prior to retirement, a beneficiary earned USD 100,000 salary plus bonus.
He didn’t save any money for retirement over 35 years.
Upon reaching Social Security FRA this year, he requests retirement benefits.
He finds it difficult to make ends meet in retirement. Even in less robust years, he earned six-figures. Now, he earns USD 31,668.
Some financial planners say younger workers shouldn’t expect to reap Social Security retirement benefits years from now. It’s better to fully fund retirement by investing in tax-advantaged and deferred investments today. If Social Security survives, these wise individuals will have “extra” monthly income from SSA.
Many workers can benefit from direct deposits to an employer-offered 401(k) plan. It’s also beneficial for most Americans to fund an Individual Retirement Account (IRA) or a Roth IRA. For investors who prefer real property to financial assets like stocks and bonds, it’s possible to buy rental properties. Rental income can also fund a reliable income stream in the future.
Social Security retirement benefits are critical to millions of Americans. Planning for retirement today can lessen reliance on Social Security retirement benefits and reduce stress about the future. Taking steps to avoid these costly Social Security retirement mistakes is something almost every person can do now.