The 3 Social Security Mistakes to Avoid

President Franklin Roosevelt’s executive order of June 1934 established the Committee on Economic Security. That led to The Law on Social Securitypronounced on August 14, 1935.

Social security provided social insurance for older Americans, funded by payroll taxes paid by employees and their employers. Working people earned pension benefits based on their average covered earnings. You could not receive benefits while earning income. Spouses and children were not eligible.

Nearly 90 years later, an estimated 180 million worked in jobs covered by Social Security in 2023, with 67 million receiving monthly benefits as of September 2023. Social Security has become a crucial part of American workers’ retirement, with 20% of beneficiaries totally dependent on this source of income for their financial survival.

Like most retirement programs, a little financial planning goes a long way toward maximizing your Social Security benefits.

Here are three Social Security mistakes to avoid as you prepare for retirement.

Advertise too early

Americans can start collecting Social Security as early as age 62. However, if you choose to take it earlier, your monthly benefits will be reduced by 30% compared to waiting until age 70. Your benefits are estimated to increase by 5-8% annually for every year you delay taking it between 62 and 70.

Reasons you can claim early include needing to make a living and a shorter life expectancy. A wrong reason to claim Social Security early is that you think the benefits won’t be there when you need them because of a depleted Social Security trust fund.

“Following the herd on misconceptions and the emergence of fear about Social Security ‘cash grabs’ creates fear that people will lose their Social Security benefit, so many people choose to take Social Security early at age 62,” the comments reported Bankrate.com. from Nick Strain, Principal Wealth Advisor at Halbert Hargrove, a financial advisor in California.

A 2022 report from Boston University and the Federal Reserve Bank of Atlanta estimated that the average amount the average worker loses in lifetime discretionary income by claiming before 70 is $182,000.

With about 25 percent of Americans claiming Social Security at age 62 and nearly half before age 70, many people don’t have more retirement income.

It does not coordinate with the husband

If you and your spouse live in a single-income household, unless you need the monthly income, you might be better off delaying taking Social Security benefits until you’re 70. However, if you both work, financial planners suggest it’s best for the lower-earning spouse to take benefits earlier if necessary, with the higher earner waiving benefits until age 70.

It is also vital in a two-income household to consider the lifetime income of each earner. If the difference is large enough, it might make sense for the lower earnings to go to a spouse rather than a pension benefit.

Spousal Benefit was created years ago and designed for a society with mainly single income households. A spouse who did not work could apply for benefitwho paid up to half of the working spouse’s monthly benefit.

Although a spouse could claim spousal benefits at age 62, it’s better to wait until your full retirement age, or FRA. If you were born in 1960 or later, your FRA is 67. So, for example, if your spouse’s FRA is $2,000 monthly, at age 67, you will receive $1,000 (50%) in spousal benefits. However, if you take them at age 62, the monthly spousal benefit drops to $650 (32.50%).

If you’re married, it’s worth having this discussion with your spouse before you turn 62.

I earn too much

While you may enjoy your job and want to continue working past 62, you will be penalized. The Social Security Administration calls this the “earnings test.” In 2024, if you collect Social Security benefits before age 67, you’ll lose $1 in benefits for every $2 you earn over $22,230 or $1,860 monthly.

Interestingly, the Social Security rules have an “adjustment reduction factor (ARF)” that restores your lost benefits when you reach age 67.

“Know that it’s a good thing to lose money on the earnings test, because for every dollar you lose on the earnings test, you get about $1.20 back in benefits,” CBS reported the Boston University economist’s comments Laurence Kotlikoff on this topic in November 2023. .

“But people aren’t told that, so they mistakenly think that going back to work just doesn’t make sense because all they’re doing is working for the government.”

So if you love what you do, work after 62.

The post 3 Social Security Mistakes to Avoid appeared first on 24/7 Wall St.