By Andrew Shilling, MarketWatch featuring Vincent Birardi, CFP®, AIF®, Wealth Advisor at Halbert Hargrove
Potentially costly Social Security moves that many of you will want to avoid.
Social Security checks represent about 30% of the income of the 65 and up set, according to the Social Security Administration, or SSA. What’s more, over 1 in 10 derive 90% or more of their total income from Social Security. That income has likely become even more essential to older Americans as inflation remains high. Consumer prices ended last year 6.5% higher than where they were in the 12 months prior, according to Bureau of Labor Statistics data. And although the cost of living adjustment (COLA) increased to 8.7% in January, Social Security benefits have fallen short by as much as $1,054 since the start of the COVID-19 pandemic in 2020, according to a Senior Citizens League report.
But there are ways to maximize your benefits. We spoke with industry experts to help you avoid these biggest — and costliest — potential mistakes in 2023.
Mistake 1: Social Security is your only — or the vast majority of — income
As many as one in five Americans over the age of 65 count on Social Security as their primary source of income, according to a recent report from the National Academy of Social Insurance. And with beneficiaries receiving an average monthly benefit of $1,658, according to the SSA, that amount is likely not enough, says Curtis Ray, financial planner and CEO of MPI Unlimited in Gilbert, Arizona.
“A tip I encourage is treating Social Security as a supplemental income — not a primary income,” Ray says. With estimates from the Social Security Board of Trustees projecting that the program will only be able to cover 75% of the scheduled benefits in 2035, Ray says the benefits from the program “should not be something you depend on as your key retirement.”
In some cases, that may mean picking up a part time job as a supplement. Just know that earning over certain limits may reduce your Social Security benefit; you can see the details here.
Mistake 2: You claim Social Security too soon
The most common mistake people make when it comes to Social Security is claiming these benefits before it’s most optimal, says Vincent Birardi, certified financial adviser at Halbert Hargrove. “Specifically,” he says, “collecting your monthly benefit at a rate that’s lower than you would be entitled to receive had you waited until a future date.”
“For every year you take Social Security early [before your full retirement age, or FRA], you are penalized and will have your lifetime benefits reduced,” says Nick Covyeau, a certified financial planner at Swell Financial in Costa Mesa, California; though he adds that for some, claiming early is smart (see below).
A retirement benefit of $1,000 is reduced by 25% to $750 for taking your benefit 48 months ahead of your 67th birthday, or the day you reach your FRA, according to the SSA. If you wait even longer — until you turn the 70 — that benefit continues to increase up to 8% to your benefits for every year you decide to delay.
For instance; a person born on Jan. 1, 1961 who earned an average annual salary of $50,000 would take home a monthly payment of $1,386 if they were to file for Social Security at the minimum age of 62, according to AARP. At their FRA of 67, that amount jumps to $1,980. And if they were to wait until 70, their monthly Social Security check amounts to $2,455. You can also check out this online calculator from the SSA for more.