8 Key Signs You’re Mishandling Your Social Security Benefits
Social Security is an important part of many Americans’ retirement plans, replacing about 40% of their pre-retirement annual income. As of April 2024, the average monthly payout was approximately $1,915 for retired workers.
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Because Social Security has a relatively meager payout, it’s important for recipients to budget carefully. If you’re worried about having enough money to live on in retirement, take a look at these key signs that you’re mishandling your Social Security benefits.
You Claim Your Benefits Too Early
Stephen Kates, CFP, principal financial analyst for Annuity.org, said that the most common way people mishandle their Social Security benefits is by claiming them too early and reducing their total lifetime benefits.
“Social Security benefits can be claimed as early as 62 years old, but by doing so the total monthly benefit will be roughly 30% less than if it was claimed at full retirement age,” he explained. “There is a reduction of about 8% for each year Social Security benefits are claimed early. For instance, someone born in 1960 has a full retirement age of 67. If they claim benefits at 65, their benefits will be reduced by about 16%.”
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You Don’t Monitor Your Medicare Premiums
“For those over the age of 65 and enrolled in both Medicare and Social Security, the premiums for the healthcare program are automatically deducted from the Social Security benefit,” said Kates.
“This can cause trouble for anyone who is not aware or monitoring their Medicare premiums. While Social Security benefits rise annually tied to the Consumer Price Index, Medicare premiums move independently and are impacted by overall income. If someone’s income or premiums rises and Social Security does not rise by a commensurate amount, it will appear that Social Security benefits are falling.”
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You Fail To Plan For Taxes
Kates said that Social Security benefits above certain income thresholds are taxable as income. For example, he explained that 85% of someone’s Social Security benefits are taxable if your income is above $25,000 (single filer) or $32,000 (joint filer).
“Not accounting for this in your tax planning can set retirees up to fail,” he said.
You Don’t Realize That Your Benefits Will Be Reduced
“If you claim your Social Security benefits before full retirement age, and are still earning income, you should expect your Social Security benefits to be reduced,” advised Kates.
“In 2024, the income limit is $22,320. If you are under full retirement age for a full year, your benefits will be reduced by $1 for every $2 you earn over the limit. In the year you will hit your full retirement age, the reduction is $1 for every $3 you earn over the limit.”
You Spend Beyond Your Means
The last thing you want to do on a fixed income is max out your budget, because you have fewer resources to pay down debts. A regular Social Security check shouldn’t be encouraging you to put money on a credit card where you’ll be carrying a balance. Instead, determine how much you can safely draw from your investments, and then add that number to your Social Security benefits. The goal is to refrain from going over the combined amount. So you avoid irresponsibly using your benefits on things you don’t need, plan how you’ll spend your Social Security check ahead of time.
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You’re Living in an Oversized Home
Consider downsizing if you still live in the home where you raised your children years after the kids have left the nest. Even if you’ve already paid off the mortgage, larger homes come with higher ongoing expenses, such as maintenance, utilities, landscaping and insurance. Plus, perks such as being in a good school district probably don’t add much value to your life anymore. Instead, consider “right-sizing” to a home that better fits your needs and your budget. Moving to a condo near where the grandkids live might make you happier and save you money, too.
You’re Spending Excessive Amounts on Car Insurance
You might be paying far too much car insurance coverage — especially if you don’t drive very much, which can be a waste of your Social Security benefits. Reduced driving habits may qualify you for lower premiums. Also, review your coverage levels and the types of insurance you have with your insurer to make sure you still need them depending on your situation. For example, if your vehicle is paid off, isn’t worth that much and you don’t drive very much, you may be able to drop collision coverage.
You Settle for Guaranteed Acceptance Life Insurance
If you’re looking for life insurance to cover final expenses such as funeral costs, you might be enticed by “guaranteed acceptance” policies, because you don’t have to submit any records or go through medical exams to qualify. Although this type of plan can save you a little time, you’ll likely pay a higher price than if you chose a policy that required some level of underwriting. That’s especially true if you are healthy.
Instead of accepting the first offer you get, take the extra time to go through the underwriting process and find out how much you can save. If you qualify for a lower rate based on your health, you can save on life insurance costs and keep more of those Social Security dollars in your pocket.
Michael Keenan contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: 8 Key Signs You’re Mishandling Your Social Security Benefits
