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Avoid These Common Mistakes with Social Security Benefits

Social security card and folded dollar bills stacked

On average, Social Security (SS) makes up 40% of retirement income for those eligible. When it comes to receiving benefits, mismanaging your social security benefits can have costly results. Social Security doesn’t lose its value, thanks to cost-of-living adjustments (COLAs). COLAs help Social Security and Supplemental Security Income (SSI) keep up with inflation.

There are four types of Social Security benefits, based on the person receiving them. These types include retirement, disability, survivors, and supplemental benefits. Avoid these common mistakes when it comes to Social Security.

  1. Claiming too early

    When you reach your full retirement age (FRA), your full monthly Social Security benefit becomes entitled to you. However, most people tend to claim their social security benefits early. This isn’t necessarily a bad thing but, it does have some setbacks.

    Claiming too early can permanently reduce your monthly payout. You could see a reduction of anywhere from 25% to 30% when you take your payout as soon as possible, depending on your birth year.

  2. Waiting too long before claiming

    Your benefit amount will not increase if you delay claiming past your seventieth (70) birthday. Delayed retirement credits boost benefits by 8% annually for people who haven’t claimed SS past full retirement age. Any retirement credits stop accruing at age 70, regardless of your filing status.

  3. Not working because of the earnings limit

    If you are full retirement age and are working, you will keep all of your benefits, no matter your age.[2] If you’re younger than full retirement age, there is a limit to how much you can earn and still receive full Social Security benefits.

    Until you reach full retirement age, Social Security will subtract money from your retirement check if you exceed a certain amount of earned income for the year. If you are collecting Social Security retirement benefits before full retirement age, your benefits are reduced by $1 for every $2 you earn over the limit. Once you reach full retirement age, there is no limit on the amount of money you may earn and still receive your full Social Security retirement benefit. [3]

  4. Not checking your annual earnings statement

    Every year, the Social Security Administration (SSA) issues an earnings statement. This earnings statement summarizes your taxable wages for the year and gives an estimate of your benefits in retirement.

    Be sure to carefully review your statement for any errors. Spotting and correcting any errors can help you avoid a reduction in retirement benefits. People who are 60 and older will receive their statement through the mail. If you’re younger than 60 years old, you’ll need to create an account on the SSA website to access your earnings statement.

  5. Not applying for widow's or widower's benefits

    Survivor’s benefits can financially help survivors of workers and retirees. Eligible survivors can file for benefits when they turn 60 years old, if your deceased spouse or former spouse worked long enough under Social Security.

    For widows and widowers, you can receive benefits:

    • At age 60 or older
    • At age 50 or older if disabled
    • At any age if you take care of a child of the deceased who is younger than age 16 or disabled.

    For divorced widows and widowers, you can receive benefits:

    • At age 60 or older if the marriage to the deceased lasted at least 10 years.
    • At age 50 or older if disabled and the marriage to the deceased lasted at least 10 years.
    • Any age if they take care of a child of the deceased who is younger than age 16 or disabled.

    For more information about Social Security Survivor Benefits, visit Social Security’s website.

  6. Not taking taxes into consideration

    Your Social Security payments are subject to taxation about certain income limits.

    For many Americans, Social Security is taxable. Those receiving Social Security benefits often pay taxes on up to half or even 85% of money they receive. This is due to the combination of Social Security and other income that puts them over the low threshold for taxes to begin. Although paying taxes on Social Security can cost you, there are ways to reduce the amount you pay.

    1. Keep some retirement income in Roth accounts

      IRAs and 401(k)s are funded with after-tax dollars. In other words, the funds you withdrawal are not taxed. As a result, you can take the Roth IRA distributions tax-free. However, they are only tax-free if you’re 59 ½ years old and have the account for more than five years.

      Therefore, the Roth withdrawal won't change your taxable income. You will also not have to pay more tax on your Social Security benefits as a result.
    2. Before retiring, withdraw taxable income

      Increasing your taxable income before beginning to draw Social Security benefits is another way to reduce your taxable income.

      You might be able to withdraw funds a little early from tax-sheltered retirement accounts such as IRAs and 401(k)s. You can take distributions penalty-free after the age of 59 ½ . Therefore, you won't be penalized for withdrawing too early, but you'll still pay income tax on what you withdraw.

      Taking withdrawals from taxable accounts (besides Roth accounts) requires careful planning with your other taxes due for that year in mind. It's ideal to make more withdrawals before you begin collecting Social Security benefits than you would when you begin receiving payments. To do that, you have to look at the total tax implications of withdrawals, Social Security benefits, and other sources.

      It’ important to keep in mind that at age 72 these accounts require minimum distributions, so plan accordingly.

      There is another benefit to this strategy. With these distributions, you may be able to delay applying for Social Security benefits when you're retired or nearing retirement. This can result in larger payments.
    3. Purchase an Annuity Contract

      The qualified longevity annuity contract (QLAC) is a type of deferred annuity financed with investments from qualified retirement plans or individual retirement accounts.

      Monthly payments for life are provided by QLACs and are protected from stock market downturns. If the annuity meets IRS requirements, it’s safe from the required minimum distribution rules up until payouts begin after the specified start date for the annuity.

      QLACs can minimize any tax bite taken from Social Security benefits by limiting distributions, and thus taxable income, during retirement.

Social Security is beneficial to many people, so it’s important to make the most of these benefits in retirement. Maximizing your Social Security can benefit your future or current retirement greatly. If there is anything we can help with, or if you have any questions, please contact us.

To apply for benefits, visit Social Security’s website for Ways to Apply for Social Security Benefits.

Sources:

This material is intended for information purposes only. The information provided should not be construed or acted upon as individualized advice, and should only be relied upon when coordinated with individual professional advice. Central Investment Advisors and LPL Financial are not affiliated with or endorsed by the Social Security Administration or any government agency. The Social Security Administration provides free Social Security forms, publications and assistance.