By Allen Giese, CLU®, ChFC®, ChSNC®, and ChatGPT
For many retirees, Social Security is an important and reliable source of income. Yet, despite its importance, the rules surrounding benefits can be surprisingly complex, and the decisions you make are often permanent. At the Social Security Administration, the system is designed to provide flexibility, but that flexibility can lead to costly mistakes if not approached thoughtfully.
Here are some of the most common missteps people make when claiming Social Security and how to avoid them.
1. Claiming Benefits Too Early Without a Plan
One of the biggest mistakes is claiming benefits as soon as you become eligible at age 62 without fully understanding the long-term impact. While it can be tempting to start receiving income early, doing so permanently reduces your monthly benefit. For example, if your full retirement age is 67 and you claim at 62, your benefit could be reduced by as much as 30%. That reduction lasts for life and can significantly affect not just your income but also spousal and survivor benefits.
Claiming early can make sense in certain situations, such as poor health or a need for immediate income. But too often, people make this decision without considering their longevity, other assets, or long-term income needs.
2. Waiting Too Long Without Considering the Trade-offs
On the flip side, some individuals delay benefits all the way to age 70 simply because they’ve heard it’s the “best” strategy. Delaying benefits up to age 70 increases your monthly payment by about 8% per year after your full retirement age. However, it’s not always the right choice for everyone.
If you have health concerns, a shorter life expectancy, or a need for income earlier in retirement, delaying may not be in your best interest. Additionally, drawing down other retirement assets too aggressively while waiting could create its own risks.
The key is balance. Your Social Security decision should fit into a broader income strategy, not exist in isolation.
3. Ignoring Spousal and Survivor Benefits
Married couples often overlook how much coordination matters when it comes to Social Security. Spousal and survivor benefits can significantly impact total household income over time. For instance, a lower-earning spouse may be entitled to up to 50% of the higher earner’s benefit. More importantly, when one spouse passes away, the surviving spouse typically keeps the higher of the two benefits.
This means the higher earner’s claiming decision can have long-lasting implications. If the higher earner claims early and locks in a reduced benefit, it may reduce the survivor benefit for the rest of the surviving spouse’s life.
Failing to coordinate these decisions and consider the broader picture can leave substantial money on the table.
4. Underestimating Longevity
Many people underestimate how long they will live, which can lead to poor claiming decisions. Social Security is essentially a form of longevity insurance. The longer you live, the more valuable a higher monthly benefit becomes. For individuals or couples with a reasonable chance of living into their 80s or beyond, delaying benefits can often provide greater lifetime income.
Yet, many people base their benefits decision on short-term thinking rather than long-term planning. This can result in lower income later in life, precisely when other resources may be dwindling.
5. Overlooking Taxes on Benefits
Another common surprise is that Social Security benefits can be taxable, depending on your overall income.
Up to 85% of your benefits may be subject to federal income tax if your income exceeds certain thresholds. This is especially important for retirees who have significant withdrawals from IRAs, 401(k)s, or other taxable sources.
Without careful planning, you could inadvertently increase your tax burden by claiming benefits at the wrong time or coordinating withdrawals poorly. A well-structured income strategy can help manage these taxes more efficiently.
6. Continuing to Work Without Understanding the Earnings Limit
If you claim Social Security before reaching full retirement age and continue to work, your benefits may be temporarily reduced if your earnings exceed certain limits.
While those withheld benefits are not “lost” forever since they are recalculated into your benefit later, this rule can still create confusion and frustration for those who are unaware of it. Understanding how earned income interacts with Social Security is crucial, particularly for those who plan to work part-time in early retirement.
7. Not Checking Your Earnings Record
Your Social Security benefit is based on your highest 35 years of earnings. Errors in your earnings record can directly affect the amount you receive.
Mistakes do happen. If you don’t periodically review your record through your Social Security statement, you may miss an opportunity to correct inaccuracies. Taking a few minutes each year to verify your earnings history can help ensure you receive the full benefit you’ve earned.
8. Failing to Integrate Social Security into a Broader Plan
Perhaps the most significant mistake is treating Social Security as a stand-alone decision rather than part of a comprehensive financial plan. Your claiming strategy should be coordinated with:
Your investment portfolio
Retirement account withdrawals
Pension income (if applicable)
Tax planning strategies
Healthcare and long-term care considerations
When Social Security is viewed in isolation, it’s easy to make a decision that seems reasonable but doesn’t align with your broader goals.
Final Thoughts
Social Security is one of the few sources of guaranteed, inflation-adjusted income available to retirees. That makes the decisions surrounding it incredibly important. There is no one-size-fits-all answer to when or how to claim benefits. The right approach depends on your health, financial situation, family dynamics, and long-term goals.
If you’re approaching retirement, now is the time to evaluate your options carefully. We can help you avoid these common mistakes and create a thoughtful, coordinated approach. A well-planned Social Security strategy can make a meaningful difference, not just in the early years of retirement, but for decades to come.