You could be losing money on your Social Security benefits – Here’s why

When discussing retirement planning, it’s common for individuals approaching retirement age to outline theirSocial Securityclaiming strategies. However, these plans often contain significant flaws because people are not well versed in the specific math required tomaximize Social Security benefits. The consequences of these errors can be significant, potentially costing retirees tens of thousands of dollars.

There are three common mistakes that people often make in their informal Social Security calculations, and understanding them can help you avoid similar pitfalls. Consider the case of Wanda Worker, age 62. Wanda can receive $1,465 per month if she claims at 62 and $2,119 if she waits until her full retirement age (FRA) of 67. However, Wanda also understands that claiming before her FRA will subject her to the earnings limit, which could reduce her benefits if she plans to continue working.

This understanding is critical to making an informed decision about herSocial Security benefits.Wanda decides that the earliest she would consider claiming is at age 67.

Wanda calculates that if she lives to age 85, she will receive $483,132 in benefits ($2,119 per month for 19 years). Her statement also shows that she could receive $2,634 per month if she waits until age 70. She calculates that this would total $505,728 over 16 years ($2,634 per month for 16 years). While this is slightly more than claiming at 67, she notes that she would have to give up three years of benefits at $2,119 per month, for a total of $76,284, to get the extra $515 per month. It would take about 11.85 years to break even, meaning she would have to live to about age 82 to recoup the lost benefits.

Wanda reasons that if she retires at 67, she can travel and enjoy her retirement while she is still working. She sees Social Security as an important source of income to fund these activities. If she doesn’t start receiving benefits at 67, she would have to dip into her personal savings, which she finds daunting. The break-even age of 82 seems far away to her, so claiming at 67 seems like a prudent decision. However, she is overlooking three critical factors: inflation adjustments, longevity, and tax implications.

Inflation

Inflation adjustments can significantly increase the benefits of delaying Social Security. Wanda’s statement provides estimates in nominal terms, not adjusted for inflation. Social Security benefits are subject to an annual cost-of-living adjustment (COLA). While this may seem to affect all benefits equally, the reality is different.

For example, based on Wanda’s statement, the additional $515 per month she could receive at age 70 is 24% more than the $2,119 at age 67. However, with a 2% COLA, her choice adjusts to $2,340 at 67 or $3,086 at 70, a difference of $747, or 32% more at age 70.

Longevity

Many people misjudge the odds of living past age 82, and their miscalculation stems from a misunderstanding of life expectancy statistics. The average life expectancy from birth is about 76 to 78 years. However, for a 65-year-old woman, the average life expectancy is about 19.7 more years, and for white-collar workers, it can increase by one to three years. Therefore, Wanda’s life expectancy could be closer to 85 to 87 years.

When Wanda considers these statistics, she may realize that unless she has serious health problems, claiming benefits at age 70 may be a strategic bet. These odds improve even more if Wanda is married because of Social Security’s survivor benefit. For married couples, only the higher benefit continues after one spouse dies, so it is important to maximize the benefit of one spouse, usually the higher earner.

Taxes on Social Security

Like many people, Wanda did not include taxes in her analysis. While some Social Security benefits are tax-free, the calculation of that portion is complex. If Social Security is a larger percentage of your total income, more of it may be tax-free.