Beginning to take Social Security benefits can be an overwhelming process for retirees since there are lots of rules and regulations, often tucked into the fine print, so to speak. It’s easy to make choices, or fail to, that can have a negative impact on your Social Security checks in big and small ways.
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Here are some common mistakes retirees make with their Social Security checks so you can hopefully avoid them.
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Taking Benefits Too Early
Many retirees decide to start collecting Social Security benefits as soon as they reach the minimum age of 62, often without fully understanding the long-term implications of beginning benefits.
“Claiming benefits early can lead to permanently reduced monthly payments,” said Christopher Stroup, CFP and owner of Silicon Beach Financial. “Claiming your benefits at age 62 can result in decreased benefits upwards of 25% to 30% versus waiting until full retirement age.”
Moreover, just because you postponed taking it at 62, for example, doesn’t mean you have to keep waiting until you’re 67. You can take it at any time in between and receive the prorated amount.
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Not Understanding the Timing
A related aspect of this, according to Patrick Ray, senior vice president at Wealth Enhancement Group, is not understanding the timing between when you file and when you first start receiving your checks.
The Social Security Administration gives people roughly a three-month window from application to first receiving your checks. Ray explained that he works with many retirees that leave their work payroll upon retirement, which means they’re no longer getting a paycheck, and often misinterpret the timing of when they’ll get their first checks.
“So, if someone decides to retire in June, they probably should start the process in April as it turns out because that does not happen overnight.”
Not Factoring in Spousal Benefits
Some retirees overlook the potential benefits that could be available through spousal claims, Stroup said.
“A spouse can claim benefits based on their own earnings record or up to 50% of the other spouse’s benefit if it’s higher. For couples where one spouse has significantly higher earnings, failing to strategize around spousal benefits can result in missed opportunities,” he explained.
Not Understanding the Tax Implications
A big common mistake retirees make is not understanding that Social Security benefits can be taxable, depending on a retiree’s total income. Stroup said, “Many retirees forget to account for how their Social Security income will be taxed, which can influence their retirement income strategy.”
Ray agreed, saying, “People do not know that their Social Security [tax] lands anywhere between 15% and 85% of their benefit depending on what their household adjusted gross income is. So, it makes for an interesting discussion when someone finds out that their tax responsibility is short because they didn’t withhold enough or they don’t withhold anything,” he said.
This is why it’s critical to speak to a tax or financial advisor before you even take Social Security, Ray said.
Not Being Aware of the Impact on Retirement Funds
Another mistake is the lack of understanding how Social Security benefits impact their other retirement assets, Ray said.
“If the plan was to reduce what they take out of their retirement monies to otherwise coordinate with their need for monthly cashflow, a lot of people use Social Security as an added buffer of additional monies that they’ve all of a sudden come into when, in fact, it makes a ton of sense to consider reducing what they remove from their retirement assets.”
Not Planning
Most of these mistakes, Ray said, can be chalked up to not planning appropriately and far enough in advance. “The moral of the story is plan, plan, plan. You can’t afford enough time to plan appropriately for what’s best for you and your family. That’s the takeaway.”
He shared that 74% of people over the age of 50 do not have a written financial plan.
Overestimating Income
Another common mistake Ray sees in his clients is people thinking they’ll have more money to spend in retirement than they did when they worked, due to Social Security.
“It just goes back to planning and projecting and budgeting all aspects of what retirement looks like so that you’re prepared to transition accordingly. Running financial projections is a big deal.”
Not Planning for Life Expectancy
Many people don’t consider how long they will live and how many years in retirement they truly need to fund, Ray said. He considers this another aspect of poor planning.
“If the males in your family have all died before 75 years old, it’s reasonable to assume that you might not make it past 75 years old. But that doesn’t mean that you shouldn’t run a financial projection to see what it would look like in case you lived 85 years old or 90 years old and commensurate with the other thought process.” Not doing so means you risk running out of money because you live too long.
Most of these mistakes can be avoided with thoughtful planning and the help of a financial advisor.
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This article originally appeared on GOBankingRates.com: 8 Common Mistakes Retirees Make With Their Social Security Checks
