Heritage Capital Warns: 5 Common Mistakes Made with Social Security

Social Security is a cornerstone element in many retirement plans. It’s also a complex beast, and inattention to details can lead to costly mistakes.

Planning how and when to claim your Social Security benefits should start well before age 62, the first year you can receive payments. By starting early and understanding all of your options, you’ll be better positioned to extract the maximum value from your Social Security benefits.

While Social Security won’t be your only source of income in retirement (on average, retirees receive 40 percent of their pre-retirement income from Social Security, and even less when considering a high net worth retirement), knowing how much you will receive is crucial to a solid retirement plan.

To get started, check out our new Social Security guide, and make sure to avoid the following 5 mistakes!


Mistake #1: Filing Too Early

It’s a common mistake to claim your Social Security benefits too early. You can begin receiving checks at age 62, despite the fact that full retirement benefits start when you’ve reached age 66 or 67 (depending on your birth year) and max out at age 70. Your starting benefit increases each year you postpone claiming your benefits, up to the maximum age. In fact, your starting monthly benefits at age 70 might be more than double that at age 62.

It’s natural to want to grab benefits as soon as possible – a bird in the hand, and so forth. However, Social Security takes a stiff toll on people who collect benefits before full retirement age, especially while continuing to work. Specifically, in 2021, you will have $1 withheld from benefits for every $2 your earnings exceed the threshold amount of $18,960.

The withholdings will eventually come back to you starting at full retirement age, but because you started receiving benefits early, your monthly amount will be relatively low for the remainder of your life. Your benefit will be reduced by approximately 0.5 percent for each month you begin taking Social Security benefits before your full retirement age. For example, if you were born in 1950 and were entitled to $1,000 a month at full retirement age but claimed benefits four years early, you would receive only $750 a month.

For specific numbers based on your situation, contact us. At Heritage Capital, we can run several different Social Security analyses for you, explaining your break-even ages and incorporating strategies that help married couples stagger their benefits to maximize their bottom line. Schedule a no-obligation conversation with me personally to get the discussion started.


Have questions about Social Security? Get them answered! Start a conversation with the team at Heritage Capital now.


Mistake #2: Filing Too Late

While it mathematically makes sense to wait to start taking your Social Security benefits until later, waiting is not the best decision for everyone! In fact, filing too late can result in throwing money away; money to which you are entitled. Make sure to consider your health, life expectancy and commitments in your decision-making process.

For instance, if delaying Social Security means you’d need to use more of your investments or savings to make ends meet, it may not be worth waiting. Withdrawing too much from your portfolio in the early years of retirement can leave your portfolio underfunded in later years. (This is especially true with a high net worth retirement!)

Taking Social Security benefits earlier can also be beneficial if you are the lower-earning spouse and starting your benefits enables your higher-earning spouse to delay his or her benefits, a strategy that can maximize your overall bottom line.

Also remember that while your Social Security benefit increases by 8 percent for each year you postpone your initial claim after reaching full retirement age, the increases stop at age 70, and there is no advantage to wait beyond your 70th birthday to start collecting.

If you think you can get a better return on your investments than the increase provided by delaying Social Security benefits, it may make more sense to start taking benefits early and invest your money instead.

Again, every situation is different. And your decision is permanent, affecting your benefits for the rest of your life. Don’t be afraid to ask for help. Let Heritage Capital run your specific numbers so you can see what each option really means.


Mistake #3: Not Taking Advantage of Spousal or Death Benefits

Spousal and survivor benefits are often overlooked!

If your spouse passes away, you can start taking survivor’s benefits as early as age 60. The amount you receive is based on your spouse’s benefits and your age. If your spouse had not taken the Social Security benefit before full retirement age and you are at that age, you can receive 50 percent of your deceased spouse’s benefit. However, you receive less if you’re under the full retirement age. For example:

  • At age 65, you get 45.8 percent of your spouse’s benefit.
  • At age 64, you get 41.7 percent of your spouse’s benefit.
  • At age 63, you get 37.5 percent of your spouse’s benefit.
  • At age 62, you get 35 percent of your spouse’s benefit.

Also bear in mind that the Social Security Administration pays a $255 lump-sum death benefit to a surviving spouse.

You will want to ensure that you and your spouse have incorporated these benefits into your retirement contingency plans, so you’re prepared if one of you should pass away.


Mistake #4: Not Considering Taxes

Unlike popular belief, Social Security benefits are taxed! For more on this, read our recent blog post: Navigating Taxes IN Retirement.

We also discussed above what happens tax-wise when you take Social Security benefits before full retirement age while still working. But that’s just part of the tax story.

The basic thing to understand is the relationship between your combined income (which is equal to half of your Social Security benefits plus your adjusted gross income and your tax-exempt income) and a base amount:

  • Base amounts for single filers are $25,000 and $34,000.
  • Base amounts for joint filers are $32,000 and $44,000.
  • Base amount for married filing singly is $0.

For joint filers in 2021, if your combined income is below $32,000, then none of your Social Security benefit will be taxed. For those with combined incomes between $32,000 and $44,000, up to 50 percent of your benefit will be subject to taxation. Those with a combined income exceeding $44,000 will be taxed on up to 85 percent of their Social Security benefits.

For an individual filer, a combined income between $25,000 and $34,000 requires that up to 50 percent of your benefit will be taxed, whereas up to 85 percent will be taxed for higher incomes and 0 percent taxed for lower incomes.

In some states, including Connecticut, Social Security is also subject to state income taxes.

Failing to consider the impact taxes have on your Social Security benefits can result in you paying more taxes than you had planned.


Mistake #5: Not Incorporating a Spouse’s Benefits into Your Plans

As a financial advisor in Woodbridge, CT, I see many people miss out on money by not incorporating their spouse’s benefits into their plans.

Your spouse can receive a benefit of as much as half of your own primary insurance amount. (Your spouse must have reached full retirement age to receive the full spousal benefit; younger spouses receive a reduced amount.)

If your spouse has reached full retirement age and is entitled to benefits, he or she can collect the spousal benefit if it’s greater than the normal retirement benefit.

For spouses who are not entitled to their own retirement benefits because of their earning records, taking the spousal benefit before full retirement age will result in a benefit reduction.

For example, suppose your primary insurance amount is $1,600 a month. If your spouse waits until full retirement age, the spouse’s benefit will be 50 percent of your benefits, or $800 a month. If the spouse claims the spousal benefit three years before his or her normal retirement age, the benefit is reduced by 25 percent, reducing the benefit to $600 a month.

Don’t Leave Money on the Table

Failing to plan is a plan to fail.

Failure to plan when to collect the spousal benefit can be costly. (Not knowing that your spouse may be entitled to a spousal benefit is tragic.) Expecting a higher benefit because you didn’t plan for taxes can be surprising. Not having accurate projections when creating your financial plan is a mistake you can avoid!

Don’t be a retirement horror story. Discuss your Social Security plan early and lean on a fiduciary financial advisor who can help you understand and select the options that work best for you. After all, it’s your financial future that’s at stake!


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Paul Schatz, President, Heritage Capital