Recently, I started studying for my private pilot’s license. As I’ve learned about the mechanics of skillfully piloting an airplane, I’ve also realized that there are many similarities between flying a plan and planning for retirement.
Take this as an example: when you fly long distances, making constant adjustments is not optional… it’s a requirement. If you fly just one degree off course for a short 300 mile flight, you’d miss your target by 5 miles!
Getting where you need to be, when you need to be there, requires precise navigation and constant adjustment. Planning for retirement is no different.
Mistakes made when you are close to or at the point of retirement could be irreversible. This is especially the case when you are making decisions about Social Security.
One of my most trusted mentors often tells me, “Big doors swing on little hinges.” The small decisions you make, when stretched over long periods, can have big consequences.
Here are the five 5 Social Security mistakes that can cost you dearly when you retire.
1. Overpayment from Income Limit
Many have never heard of an “overpayment notice” until they receive one. After all, if the Social Security Administration is sending you a check, they must have performed enough due diligence to determine that you were entitled to that check. Right?
Hardly. The “Notice of Overpayment” letter is one that strikes fear in the recipient. I frequently get calls and emails from clients that sound something like this:
“Surely this is not correct. I mean, if I wasn’t supposed to receive a check, why would they send it to me.?How am I supposed to keep up with all the rules?”
I understand why this is so frightening and frustrating. We’re given convoluted set of rules to follow, and then, up to five years later, they can come back and say that you should have not have received benefits for a certain period.
And then they demand a certain dollar amount that you need to pay back. This is usually thousands of dollars. In many cases, the money simply isn’t there to repay.
There is one big reason I see people receiving these letters from the Social Security Administration: they were over the income limit. This means that they were under full retirement age, filed for benefits, and their income was too high.
This income limit changes from year to year, but for 2018 it is $17,040. The Social Security Administration won’t always ask the right questions to determine if you’re over the limit when they process your application.
Sometimes it takes your tax return getting cross checked by the SSA to catch it (which can happen years later).
If you think you could be over the income limit, don’t think you’ll get away with receiving a benefit. They will catch it and want their money back.
Check out these two articles to read more on the income limits and what you need to know about them to avoid this mistake:
2. Messing Up Spousal Benefits or Survivor Benefits
I’ve had more than one client come in and tell me that they were going to wait until they turned 70 to file for a spousal or survivor benefit.
If a spousal or survivor benefit is the highest benefit that you’ll ever receive, there is no need to delay past your full retirement age. Why? They stop increasing after that!
Survivor benefits are even more important. For example, let’s assume Jim’s full retirement age benefit was $2,000. However, he filed at 62 and began receiving and age-based reduced benefit of $1,500. He died two years later.
Because of his early filing, the most his surviving spouse will receive is the greater of his actual benefit ($1,500) or 82.5% of his full retirement age benefit ($2,000 x 82.5% = $1,650).
Based on the reductions for her filing age, she’d hit the 82.5% ($1,650) of his benefit right in between age 62 and 63. Once she was was at this age, there would be no benefit to continuing to delay filing for benefits. Further delay will not increase the survivors benefit!
Social Security Survivors Benefits are deceptively complex. You can read the easy-to-understand guide I put together for you here.
3. Not Checking Your Earnings Record
How confident are you that your Social Security earnings record is accurate? Unless you’ve checked it recently, you shouldn’t be too sure.
Mistakes in an individual’s Social Security earnings record are actually much more common than most people think.
Since the inception of Social Security, there have been a total of $1.2 trillion in wages that could not be matched to an earnings record. In tax year 2012 alone, the Social Security Administration reported $71 billion in wages that could not be matched to an individual’s earnings record!
A mistake in your earnings history can make a big difference in how your Social Security benefits are calculated. How? It all goes back to the formula used to calculate benefits.
The Social Security Administration uses your highest 35 years of earnings as a cornerstone of the benefit calculation. If any of these 35 years are incorrect or missing altogether, the average is skewed.
One year of missing earnings can make a big difference in your monthly benefit amount.
I’ve written a step-by-step guide to checking your earnings record that you can use to make sure yours is correct.
4. Not Calculating the Tax
Don’t get hit with sticker shock when you find out how much you’ll have to pay in taxes on Social Security income.
To some, it doesn’t seem fair. You’ve worked for years and paid your Social Security tax as the admission ticket to a Social Security benefit. Now that you’re collecting that benefit, you have to pay taxes? Again?
Today, somewhere between 0% and 85% of your Social Security payment will be included as taxable income. If you are already paying high taxes because of a pension, 401k distribution or some other income source, this could take a big bite out of your benefits check.
A discussion on taxes and Social Security requires an article of its own. You can find more reading on this topic in my article Taxes on Social Security.
5. Relying on the SSA for information
Think you can rely on the SSA for good advice and information? Think again.
Beyond the anecdotal horror stories I’ve heard from clients who were led astray by well meaning SSA technicians, there is hard evidence that they can, and will, screw up advising you on the best course of action.
For example, the Office of the Inspector General conducted a survey that estimates they underpaid $131.8 million in survivor benefits to 9,224 individuals. That’s just survivor benefits!
There’s no telling what it would be if they could look at all benefits.
The point? Taking advice from Social Security representatives may be hazardous to your wealth!
Although these are the five mistakes that can really hurt your Social Security strategy to get the most from your benefits, there are other mistakes that can be detrimental as well. The best way to protect yourself from all of these?
Get educated! Ask questions!
We have several resources that will help you in this quest. There’s our YouTube channel, my books and my free Q&A page on this website. Take advantage of these free resources that’ll help you plan for an awesome retirement.