Social Security benefits can be a critical financial lifeline for retirees, but mistakes in planning and timing can undermine their effectiveness. Financial professionals have identified three common errors that retirees make, along with strategies to avoid them.
The first mistake is claiming benefits too early. While payments can start as early as age 62, doing so permanently reduces monthly benefits. For example, those born between 1943 and 1954 would receive only $1,500 of a $2,000 benefit if they retire at 62 instead of 66. Steve Sexton, CEO of Sexton Advisory Group, warns that many people file early without understanding the long-term impact, which can lead to financial strain later in life, especially as medical expenses rise.
The second blunder is overlooking taxes on Social Security. Benefits become taxable when combined income—including earnings, nontaxable interest, and half of the benefit—exceeds $25,000 for single filers. Up to 85% of benefits can be taxed if combined income surpasses $34,000. Sexton notes that retirees are often shocked to learn their benefits are taxable, and withdrawals from retirement accounts like 401(k)s or IRAs can inadvertently push them into a higher tax bracket.
The third mistake is ignoring cost-of-living adjustments (COLAs). Each year, Social Security increases benefits to keep pace with inflation. Certified financial planner Vincent R. Birardi explains that failing to account for these adjustments can lead to poor budgeting. Retirees should plan for inflation's impact on expenses and factor in COLAs to ensure their savings last throughout retirement.
To avoid these pitfalls, experts recommend proactive planning. Sexton advises coordinating Social Security with retirement accounts, taxes, and spousal benefits, and considering delaying benefits to improve long-term security. Creating a tax-efficient withdrawal strategy and budgeting for inflation can also help retirees maximise their benefits.
