It’s hard enough to save what you need to support you in retirement. Every dollar can be important. Thus, it’s more than aggravating if and when you learn that you’ve left some money on the table — money that could have helped you once you retire.
One source of painful losses are Social Security mistakes. Most of us are not Social Security experts, so it can be surprisingly easy to make bad moves. Here are three blunders that could cost you a lot.
1. Starting to collect benefits at a less-than-optimal age
Many people assume that 65 is the age when we all start collecting Social Security. Nope. Full retirement age — when we can start getting our full benefits — used to be 65, but it has been tweaked over the years, and it’s now 67 for those of us born in 1960 or later, and 66 for millions born earlier than that. Despite that, we can elect to start receiving benefits as early as age 62 and as late as age 70.
When you start collecting is a major factor in how big your checks will be. For every year beyond your full retirement age that you delay starting to receive benefits, you’ll increase their value by about 8% — until age 70. So delaying from age 67 to 70 can leave you with checks about 24% fatter. If your full benefits would have been $2,000 per month, they would grow to $2,480 — a meaningful difference of $5,760 over a year.
Start collecting at 62, and your benefits may be up to about 30% smaller. That can seem like a convincing reason to not start collecting early. But even though the checks will be smaller, there will be many more of them. The amount of the reduction was determined by Social Security’s actuaries to lead to roughly the same amount of total benefits received for those with typical life spans — no matter when they start collecting.
So think about whether you’re likely to lead a life that’s significantly longer or shorter than average — as well as when you expect to really need the income. Spousal strategies can come into play, too, and we’ll touch on that later.
2. Not working for at least 35 years
The formula that the Social Security Administration uses to compute your benefits is based on your earnings in the 35 years in which you earned the most. (They adjust these numbers for inflation.) So to maximize your benefits, you should aim to have at least 35 years of income. Otherwise, if you earned income in only 27 years, for example, the formula will be incorporating eight zeros, which will shrink your benefits considerably.
If you have worked for 35 years, you might still be able to boost your benefits — assuming that you’re now earning much more than in the past (on an inflation-adjusted basis). If so, each year that you work in excess of 35 will remove one of your lowest-earning years from the calculation, replacing it with a higher-earning year — and boosting your eventual Social Security benefit.
3. Not coordinating with your spouse
Finally, here’s another common blunder. There are actually dozens of Social Security strategies for married couples. Obviously, you might both opt to start collecting early, at age 62. That way you’ll be receiving some income for a longer period. The average monthly retirement benefit was recently $1,470, so if the two of you meet the definition of average or have earned a little more, you may be looking at around $3,000 per month total, or about $36,000 annually. If you both choose to delay starting to collect until age 70, you might be receiving a total of around $3,700 monthly, or nearly $45,000 annually.
It can make sense, too, for one of you to start collecting early and the other to try to hang on until age 70. That gives you both some income early, while making one set of checks bigger. That can come in handy when one spouse dies, because while the surviving spouse will then only get to collect one check per month, it will be whichever check is larger.
There are more strategies to consider, and more things to know about Social Security — including a bunch of ways to increase your benefits. Taking some time to learn more can really pay off.