Social Security benefits are a key part of many people’s income in retirement. In fact, according to a fact sheet published by the Social Security Administration, “Social Security is the major source of income” for most older Americans.
With so many people relying on Social Security, it is important to understand common Social Security pitfalls so that you can avoid them. Understanding the potential mistakes that can be made with your Social Security benefits is especially critical because some are irreversible and can cost you for as long as you are collecting benefits. Below are four of the most common Social Security pitfalls to be aware of and avoid.
Pitfall #1: Not Understanding How Social Security Retirement Benefits are Calculated
To maximize the amount of your Social Security retirement benefit:
- You will need to have worked a minimum of 10 years and have 40 quarters of work credits over a lifetime (you can earn up to 4 work credits / year).
- The amount of your Social Security benefit is based on your highest 35 years of income. Therefore, it’s best to avoid having too many years with no income, if possible. Otherwise, your Social Security earnings average could be greatly reduced.
- You may want to consider working beyond your full retirement age (more on this under Pitfall #2). Especially, if you do have years with little or no income, continuing to work past full retirement age can boost your average and increase your benefit.
You can get an estimate of what your Social Security benefit will be in the future, you can go to the Social Security Retirement Estimator.
Pitfall #2: Applying for Social Security Benefits too Early
Deciding when to apply for benefits is complicated, but is important to understand. The first thing to know is what your “full retirement age” is, as determined by the Social Security Administration. For anyone born in or after 1960, your full retirement age is 67 (if you were born before 1960, you can find your full retirement age).
- Although you can begin drawing on Social Security benefits as early as age 62, you will receive up to 30% less than if you had waited until your full retirement age. For each month you delay collecting benefits between age 62 and your full retirement age, the more your Social Security benefits will be (with 100% of your Social Security retirement benefit available at your full retirement age).
- Further, if you delay applying for Social Security benefits, beyond your full retirement age (up until age 70), you can earn up to an additional 8% per year.
- If you wait until you are 70 to start collecting Social Security benefits, you can receive up to 24% more (8% x 3 years = 24%) than you would if you began collecting benefits at your full retirement age. This increased benefit amount (up to 124%) will be what you receive for the rest of your life.
There may be reasons you need to apply for Social Security benefits earlier than your full retirement age. However, the longer you can delay taking Social Security (up until age 70), the higher your monthly benefit will be for the rest of your life.
When you do decide you are ready to begin taking your Social Security benefits, the easiest way to apply is through the Social Security Administration website.
Pitfall #3: Not Understanding Spousal Benefits (including from an ex- or deceased spouse)
Another common Social Security pitfall is not understanding potential spousal benefits you may be entitled to. If you are divorced, not remarried (regardless of whether your ex-spouse is remarried) and your ex-spouse is eligible for Social Security benefits, you can:
- Collect Social Security on your ex-spouse’s Social Security work record, if you were married at least 10 years, and you are at least 62 years old (or at least 60 years old, if your spouse is deceased).
- Take the higher of your Social Security retirement benefit OR 50% of your ex-spouse’s retirement benefit amount (if you were born in or after 1954). If you were born before 1954, you can begin collecting on your ex-spouse’s Social Security benefits, while your Social Security benefit continues to grow. You can then take your own benefits at 70.
If you remarried, but are currently single, you can choose to apply for Social Security benefits from either your first or second former spouse. Again, you can only apply for benefits from a spouse you were married to for at least 10 years.
Pitfall #4: Not Registering for Medicare at Age 65
If you are not getting Social Security benefits prior to turning 65, you will not be automatically notified that you need to apply for Medicare. Medicare is federal health insurance for people 65 and older, who have 40 quarters of work credits themselves or through a spouse. You can and should apply for Medicare immediately prior to turning 65 through the Social Security Administration. In fact:
- You can sign up for Medicare 3 months prior to your 65th birthday, and up to 3 months after your birthday.
- If you sign up for Medicare late, you can be penalized.
- Even if you are working and have employer sponsored insurance, you should still get Medicare Part A, hospital insurance.
- If you do still have employer sponsored insurance, you should ask the Social Security Administration whether your employer sponsored insurance or Medicare would be the primary insurance.
As you can see, there is a lot to know about Social Security and it can be confusing. Hopefully, armed with this information you have educated yourself so that you can avoid the most common Social Security pitfalls.
