(Alka Mehta)
Social Security provides one of the highest early retirement incomes for most American workers—a pot of gold at the end of their professional lives. But many of those who rely on Social Security income also misunderstand it, and this ignorance can be costly. Here are five common mistakes people make when thinking about Social Security and why they’re worth avoiding.
1. All seniors receive the same benefit
40% of working adults believe everyone receives the same amount of Social Security in retirement. Instead, the benefit payment is tied to your earnings and the amount you contributed to Social Security taxes throughout your working years.
The Social Security Administration uses the average monthly earnings of beneficiaries over the years to calculate the dollar amount each person will receive at their full retirement age. Social Security assumes that workers who earned more during their careers will need less help in retirement. The more you earn before you retire, the less percentage of that income Social Security will replace later.
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2. Even if you claim them early, your benefits will increase at full retirement age
You can start collecting Social Security at age 62, but it’s not required. The full Social Security retirement age, after which you automatically start receiving benefits, varies depending on the year you were born: 66 for those born in 1943 and later, gradually increasing to 67 for those born in 1960 or later .
If you start collecting your benefit before your full retirement age, your monthly check is reduced by almost 30%, permanently, because Social Security will distribute the same total fund of benefit money you are owed, based on a life expectancy of 78.6 years – during more controls and a longer period of time. If you live longer than that, waiting until full retirement age will give you larger checks for the rest of your life than you would by claiming benefits earlier.
3. Guaranteed annual COLA
The annual cost of living adjustment, or COLA, uses a subset of the consumer price index known as the CPI-W to increase Social Security benefits to offset inflation.
But under the Social Security Act, benefits only increase if the average CPI-W in the current year’s third quarter is higher than its prior year counterpart. Some years don’t see any increase in benefits due to inflation, but only because inflation itself hasn’t increased in that period.
4. It is always better to claim Social Security as soon as possible.
There is no one-size-fits-all answer to this crucial question! If you apply early, you’ll have extra money to travel and spend time doing the things you love to do while you’re younger. It’s also possible that you simply need the money or are living with health problems that make you think you probably won’t reach your full retirement age.
But if you’re in average to excellent health, with an above-average life expectancy, you can make more money waiting. If you plan to work before you reach retirement age, that may possibly reduce your benefit. (More on that below.) And if your lifetime earnings exceed your spouse’s, waiting longer can ensure a greater spousal benefitalso.
5. Once I start receiving social security benefits, I can no longer work
You they can keep working, with some caveats. In 2022, people under full retirement age can earn up to $19,560 in income without penalties. Your benefit is reduced by $1 for every $2 you earn above that amount. The earnings limit increases with your age, and beginning with the month you reach full retirement age, there is no limit to how much you can earn and still receive all of your benefits.
In the event that you regret the permanent reduction in benefits for claiming early, or return to work with a higher salary, or are just plain bored, you can reverse your decision, as long as you have started receiving Social Security. benefits less than 12 months ago. Once in a lifetime, Social Security gives you a second chance; you can withdraw your application for benefits, pay back all the money you received, and apply again at a later age.
Social Security is a complex issue due to all the variables that come into play, mixed with the particular situation of people. Please do your own careful research and talk to your local Social Security office before making any important decisions.
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