Chances are, Social Security will play an important role in your finances during retirement, so it’s important to get as much out of those benefits as possible. But the wrong moves on your part could cause you to lose out on money that’s vital to your financial wellbeing later in life. Here are three such mistakes it pays to avoid at all costs.
1. Retiring early when you don’t have 35 working years under your belt
Your Social Security benefits are calculated based on your 35 highest-paid years on the job. If you don’t work 35 years, you’ll have a $0 factored in for each year you’re without an income. And that’s something it pays to consider if your plan is to retire early.
Of course, some workers retire early out of necessity more so than choice. In fact, an estimated 48% of people leave the workforce earlier than planned, largely due to reasons like job loss or health issues. But if you have the option not to retire early and you’re missing a few years of earnings to get to 35, then it pays to extend your career to avoid that hit to your benefits.
2. Claiming benefits at a young age when you’re likely to live a long life
The monthly benefit you’re entitled to based on your 35 highest-paid working years is yours to collect in full once you reach full retirement age, or FRA, which is either 66, 67, or somewhere in between — it depends on the year you were born. You can claim benefits as early as 62, but filing before FRA will give you a lower monthly benefit. And on the flipside, delaying benefits past FRA will boost them by 8% a year up until age 70.
That said, you’ll generally break even in terms of lifetime Social Security benefits if you live an average lifespan. That’s because lowering your benefits by filing early will also give you a larger number of individual payments, while raising your benefits by waiting will result in fewer payments. But if you’re likely to live a long life, then you’ll generally come out ahead all-in by delaying benefits as long as possible. And if you jump the gun and file sooner, you could lose out on a substantial amount of lifetime income.
Say you’re entitled to $1,500 a month at an FRA of 67. Claiming that benefit at 62 will reduce it to $1,050. You’ll break even around age 78 1/2, but if you live until 90, you’ll lose out on $61,200 in lifetime benefits by claiming them at 62 instead of waiting until FRA. As such, if your health is great as retirement nears, it pays to wait on Social Security.
3. Delaying benefits when your health is poor going into retirement
Just as you’re likely to come away with a higher lifetime benefit by claiming Social Security on the late side when your health is great, the opposite holds true if your health is poor — waiting doesn’t make a lot of sense. If you delay benefits until age 70 but only live until 75, you’ll have just five years to collect them.
When your health is poor, you’re better off filing for Social Security on the early side. The only exception is if you have a spouse who’s likely to outlive you by many years. In that case, you may want to delay your filing not for your own sake, but for the sake of your spouse, because he or she will be entitled to 100% of your monthly benefit once you pass.
The decisions you make regarding Social Security could have a huge impact on you throughout retirement. Avoid the above mistakes, and you’ll also avoid losing out on income you probably can’t afford to part with.