In 2019, 64 million Americans will collect a total of more than $1 trillion in Social Security, according to the Social Security Administration (SSA). For many of them, these benefits are an important part of their retirement budgets.
If you're a part of this group and are nearing retirement, you may want to give Social Security planning the same amount of time and attention as your overall retirement planning.
Every person's financial situation is unique, so certain factors will influence what the right distribution strategy is for you. However, there are some clear mistakes people make with Social Security. Here's what they are and how you can try to help avoid them.
1. Not Checking Your Earning Statements
According to the SSA, your benefits are based on a formula that the agency applies to your average monthly earnings during the 35 years you earned the most.
If you're not completely sure how much you've earned or want to make sure the agency's records match your own, you can set up an account on the SSA website to review your earnings statement. If the information isn't accurate based on documentation like your tax returns from previous years, W-2 forms or pay stubs, you may want to contact the agency to correct the record. You'll just need to provide the documentation to prove their records contain errors and should be corrected.
2. Claiming Benefits Too Early
Generally, unless you have a pressing financial reason, it's likely best to wait until you reach your full retirement age, which varies depending on your birth year, so you can collect your full benefit amount. If you must claim benefits early, consider budgeting accordingly to cover the gap in your benefits.
3. Not Knowing the Earnings Limit
There's a misconception that if you continue to work, you can't claim Social Security at the same time. But you actually can collect benefits before concluding your career. There are just a few things to consider if you plan to do so.
For 2019, the earnings limits for Social Security is $17,640, according to the SSA. That means you can earn up to this amount and still receive all your benefits. However, if you aren't your full retirement age for the entire year, Social Security will deduct $1 from your benefits for every $2 you earn above the $17,640 limit. If you've reached full retirement age, the deduction is $1 for every $3 you earn above the limit.
4. Thinking You Can Stop & Start Your Benefits
It's important to know that you can't start and stop your benefits at will for the duration of your retirement. If you decide you no longer want to collect Social Security 12 months or more after you become eligible to receive it, you won't be able to withdraw your application, according to the SSA.
However, you can withdraw your Social Security claim before this time and then reapply in the future, even if you've started to receive benefits. Just keep in mind that you only can do this once and you'll have to pay back the benefits you collected.
5. Not Paying Taxes on Your Benefits
Social Security benefits are considered income, and you may owe taxes on these benefits, according to the SSA. It depends on how much you earn from other sources.
If you're a single tax filer and earn income from other sources between $25,000 and $34,000 during the tax year, you may have to pay income tax on up to 50% of your Social Security benefits. If you file jointly and you have a combined income between $32,000 and $44,000 during the year, you also may have to pay income tax on up to 50% of your benefits. If your combined income is above this amount, 85% of your benefits could be taxed.
To find out if you'll owe any taxes, you can look at your Social Security benefit statement, which the SSA sends at the end of every tax year. However, it may be better to be proactive when it comes to potential taxes. You can either have federal income taxes withheld from benefits when you first apply or you can make this change if you've already started to receive benefits.
Planning Your Social Security Distribution Strategy
Properly planning for Social Security can complement your retirement savings strategy and help to put you on the path to financial security in retirement.
Check your earnings statements on a regular basis, understand how the Social Security earnings limit and claiming early can affect your benefits, and if you generate income outside of Social Security, consider putting some money aside to pay potential taxes. With the right Social Security distribution strategy, you can help avoid mistakes that may cost you financially.