Avoid These Six Common Errors in Claiming Social Security

Social Security benefits are one of the most convenient sources of income in your retirement. They can add to your retirement corpus and aid in many ways. Social Security benefits can help you lead a comfortable life in old age and be used to pay for routine costs, expensive purchases, and more. The funds also add to your net worth, thereby improving your credit score, making it easier to get a loan if need be. As per statistics, more than 64 million people claimed their Social Security benefits in June 2020. This comes down to over 1 in every 6 individuals. However, as integral as Social Security is in America, not many people are fully aware of how to maximize their benefits. In fact, most retirees continue to make small errors of judgment while withdrawing their funds.
Here are six common errors in claiming Social Security benefits and how you can avoid them to gain more from this retirement tool.
Withdrawing the funds early in life
As per the rules of Social Security benefits, you can claim your funds at the age of 62. However, this can result in lower earnings. Therefore, it may be recommended to wait till you reach your full retirement age before starting to collect your benefits. Understanding the concept of your full retirement age can be a bit challenging, primarily because this age may vary for each individual depending on their age.
The full retirement age is decided based on the year of birth. A common misconception is to believe that the full retirement age is 65. But this is only for individuals who were born in 1937 or before. If you were born three years later i.e. in 1940, your full retirement age would change to 65.5. Those born another ten years later will have a full retirement age of 66. People born after 1960 will have a full retirement age of 67.
If you claim your benefits before you reach your full retirement age, your benefits can be considerably reduced. So, unless absolutely necessary, it may be advised to wait for a few more years. Moreover, if you delay making any claims till the age of 70, you can receive up to 8% extra funds every year for each year beyond your full retirement age. So, a check of $1,000 can amount to $1,080 in just a year.
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Not understanding the effect of marriage on Social Security
As a married couple, many of your finances may be intertwined. This is why it helps to know the repercussions of divorce and remarriage on your money. If you have been claiming Social Security benefits of your spouse under the ex-spousal Social Security benefits scheme, remarriage can put a stop to it. As per this scheme, if you have been married for a minimum of 10 years and you and your spouse are both at least 62 at the time of withdrawal, you can claim your ex-spouse’s benefits. Remarriage before the 10 year mark may cause you to lose out on these benefits. In such a case, you will be able to claim your new spouse’s benefits but would have to let go of your ex-spouse’s Social Security funds.
If your second marriage also ends in divorce, you will have the option to choose between the two ex-spouses’ benefits as long as both the marriages lasted for a minimum of 10 years each. If one of the marriages lasted 10 years while the other was shorter, you could still claim the former one’s Social Security benefits as long as you are unmarried.
The rules slightly differ in the case of a deceased spouse. In case you are claiming the benefits of a deceased spouse, you can withdraw the same at the age of 60. However, you should be married for at least 9 months before the unfortunate demise of your spouse. If the deceased is your ex-spouse, you can still claim survivor benefits at the age of 60, but you should have been married for at least 10 years before your spouse passed away. In such a case, getting remarried would not have any effect on your ex-spousal benefits.
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Working in your retirement
Ideally, Social Security benefits are meant to support you at a time when you have no active sources of income, such as from a job. So, if you do have a job and are earning a significant income from it, the benefits from your Social Security can increase your tax liability. Under the full retirement age, $1 is deducted for every $2 that you earn over the annual limit. As of 2020, this limit is fixed at $18,240. If you have crossed the full retirement age, $1 is deducted for every $3 that you earn over the annual limit. For 2020, this is fixed at $48,600. Hence, while working will certainly get in more cash flow, it can also be detrimental to your earnings if a considerable portion of them end up being taxed. It helps to consult a financial advisor to work this out efficiently.
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Stopping your benefits midway
A lot of people think that claiming Social Security and then stopping these benefits at will is permissible. However, there are some rules to this. If you wish to stop claiming your benefits 12 months after the first filing, you need to repay all your benefits in order to be able to claim them later in the future. There is no option to simply start and stop your benefits as you see fit. Therefore, it is essential to plan your withdrawals along with your other retirement earnings, so that you can effectively draft out a withdrawal strategy.
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Not following the restricted application strategy
As per the restricted application strategy, one spouse can defer their benefits till the age of 70. If one spouse was born before Jan 2, 1954, the other spouse can delay their benefits and claim spousal benefits instead. This can help you maximize on one spouse’s benefits while your Social Security grows till the age of 70. At the same time, the spousal benefits help you stay financially secure. The restricted application strategy can also be used by divorced couples. Couples can earn a lot more if they follow this approach.
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Fearing loss of benefits if you pass away before the age of 70
Life is unpredictable, and adversities can land on your door when you least expect it. This is a major reason why many retirees withdraw their benefits as early as they can, as they fear not being able to use their funds. However, it is essential to remember that even if you are not able to use your benefits yourself, delaying claiming Social Security till the age of 70 can still benefit your spouse in your absence. Therefore, if you have other retirement accounts and investments to rely on, it may still be advised to delay claiming your Social Security to maximize returns.
To sum it up
Social Security benefits can be your ally in retirement, but it is important to know how and when these benefits should be claimed. It also helps to have a strategy in place and discuss the same with your spouse, so that both of you can gain an advantage without losing these funds to rules and regulations. Even if you have never worked or do freelance work at part time jobs, you can still claim the Social Security benefits of your spouse. So, it always helps to know about these common errors surrounding Social Security and what you can do to avoid them.
If you need help in retirement planning or want to know about claiming your own or your spouse’s Social Security benefits, you can reach out to a professional financial advisor in your area for help and assistance.