When planning for retirement, many people make mistakes with their Social Security calculations, which can cost them a lot of money. Understanding the common mistakes and how to avoid them is important. This article will explain these mistakes using the example of Wanda Worker, who is deciding when to start her Social Security benefits.
Common Social Security Mistakes
Mistake 1: Claiming Too Early
Many people claim their Social Security benefits as soon as they are eligible at age 62. However, this can lead to reduced benefits. For example, Wanda Worker can receive $1,465 per month if she claims at 62, but she would get $2,119 per month if she waits until her full retirement age (FRA) of 67. Claiming early also subjects her to the earnings limit if she continues to work, which could reduce her benefits even more.
Mistake 2: Not Considering Inflation
Inflation adjustments can significantly impact Social Security benefits. Wanda’s statement shows her monthly benefits in today’s dollars, not adjusted for inflation. Social Security benefits increase each year with the cost-of-living adjustment (COLA).
For example, the $2,634 she could get at age 70 is worth more than the $2,119 at age 67, especially after accounting for inflation. With a 2% COLA, the difference between claiming at 67 and 70 becomes even more significant.
Mistake 3: Misjudging Longevity
Many people underestimate how long they will live. The average life expectancy for a 65-year-old woman is about 19.7 more years, meaning she could live until around 85. For white-collar workers, it could be even longer.
Wanda initially plans to claim at 67, but if she lives past 82, she would have received more money by waiting until 70. Longevity also matters for married couples, as the higher benefit continues for the surviving spouse.
Mistake 4: Ignoring Taxes
Wanda, like many others, did not consider taxes in her calculations. Some Social Security benefits are tax-free, but the amount can vary. If Social Security is a large part of your income, more of it may be tax-free. Understanding how taxes affect your benefits is crucial for accurate planning.
Wanda’s Decision
Wanda decides to claim her benefits at 67. She calculates that if she lives to 85, she will receive $483,132 in benefits. If she waits until 70, she would get $505,728 over 16 years, which is more money overall. However, she would need to live until 82 to break even. Considering inflation, longevity, and tax implications could change her decision.
Planning when to claim Social Security benefits is a crucial decision that can have a big impact on your retirement income. Understanding common mistakes, like claiming too early, not considering inflation, misjudging longevity, and ignoring taxes, can help you make a better decision. For personalized advice, consider consulting with a financial advisor.
When is the best age to claim Social Security benefits?
It depends on your financial situation, health, and life expectancy. Waiting until full retirement age or later can result in higher monthly benefits.
How does inflation affect Social Security benefits?
Social Security benefits increase annually with the cost-of-living adjustment (COLA), which helps offset inflation.
What is the average life expectancy for retirees?
The average life expectancy for a 65-year-old woman is about 19.7 more years. For white-collar workers, it can be longer.
What are the tax implications of Social Security benefits?
Some benefits are tax-free, but the amount can vary based on your total income. Understanding your tax situation is important.
How does claiming Social Security early affect benefits?
Claiming early results in reduced monthly benefits and may also subject you to the earnings limit if you continue to work.
