Social Security is so vital to so many people’s retirement plans, and yet is so shrouded in uncertainty. Some of this is beyond our control, but you have more power than you think when it comes to determining the size of your checks. Understanding how your decisions affect your Social Security benefits can help you avoid devastating mistakes that could cost you tens of thousands of dollars over your retirement.
Here are three of the most common — and costly — Social Security mistakes you can make.
1. Retiring without considering the consequences to your benefits
Your Social Security benefits are based on your average monthly income during your 35 highest-earning years with adjustments for inflation. This is called your average indexed monthly earnings (AIME). If you haven’t worked for at least 35 years, the Social Security Administration adds a zero to your calculation for every year you didn’t work, which can bring down your AIME considerably. This, in turn, reduces your Social Security benefit checks, possibly by tens or even hundreds of thousands of dollars over your lifetime, depending on how many years you actually worked.
If you work less than 10 years, you could disqualify yourself from Social Security altogether, although you still might be eligible for spousal benefits if your spouse has worked enough years to qualify for Social Security. For most people, a spousal benefit — which is half of your spouse’s Social Security benefit — is less than what they’d be entitled to based on their own work records if they worked for at least 10 years, so it’s best to pursue your own benefit whenever possible.
Try to work for at least 35 years, and longer if you can. If you work more than 35 years, your lowest-earning years will drop off of your record to be replaced by higher-earning years. This will give your benefits a boost that will continue to pay dividends for years to come.
2. Not coordinating your Social Security plan with your spouse
The age at which you begin taking Social Security also affects your benefits. In order to get your full benefit, you must wait until your full retirement age (FRA), which is 66 or 67 for today’s workers. You can start as early as 62, but you’ll only get 70% or 75% of your scheduled benefit per check depending on whether your FRA is 67 or 66, respectively. Delaying benefits past your FRA increases the number on your checks until you reach the maximum benefit of 124% of your scheduled benefit for a FRA of 67, or 132% for a FRA of 66 at age 70.
Single individuals only have to decide when they want to start benefits, but married couples have to consider how their decision will affect their spouse, especially if their spouse is planning to claim benefits on their work record. It’s best to coordinate with your spouse in advance so you can better estimate how much each of you will get from Social Security. Otherwise, you could accidentally cost one or both of you a lot of money.
A common strategy among couples looking to maximize their benefits is for the lower-earning spouse to begin claiming benefits as soon as they’re eligible, at 62. This enables the higher-earning spouse to delay benefits until 70, when they’re entitled to the largest checks. If the higher earner’s spousal benefit would give the lower-earning spouse more money than they’re entitled to based on their own work record, the SSA will automatically switch them over when the higher-earning spouse applies for benefits.
If both people earn about the same amount, you can still use this strategy, though it may not make as much of a difference in your lifetime benefits. You might be better off both delaying your Social Security benefits as long as you are able to.
3. Failing to verify the accuracy of your earnings record
The SSA keeps track of how much you’ve paid into the program using your earnings record, which you can view, along with estimates of your Social Security benefits at different ages, by creating a my Social Security account. As part of the government, its information is usually pretty accurate, but mistakes do happen.
If your employer made an error reporting your income, or you’ve changed your name but failed to notify the SSA, your income might not be reported correctly, and your earnings record will indicate that you earned far less than you actually did. This could bring down your AIME and consequently reduce your Social Security benefits. It’s especially problematic if the error indicates that you didn’t earn any money at all for a year that you know you worked.
Check your Social Security earnings record at least once per year, and compare the information listed there against your own records. If you notice a mistake, contact the SSA and gather paperwork, like your W-2, a tax return, or wage records, to indicate how much you earned throughout the year in question. You typically have three years, three months, and 15 days from the end of the year to correct the error.
Most people think the size of their Social Security checks is largely up to the government, but this attitude could lead you to overlook the power you do have and, consequently, make mistakes that prove costly later. If you haven’t yet made a plan for taking Social Security or checked your Social Security earnings record, do so now.
