Social Security plays a critical role in many people’s retirement plans, providing crucial income to older Americans. However, making the wrong choices regarding Social Security could potentially undermine your retirement savings. Here are three common mistakes to avoid:
1. Filing Too Early
While you can start claiming Social Security benefits at age 62, doing so will result in a reduction of your monthly payments. For people born in 1960 or later, full retirement age (FRA) is 67, and you won’t receive the full benefit until then.
If you have health concerns or other urgent financial needs, filing early may make sense. However, unless there is a specific reason, consider waiting until FRA or beyond. For every year you delay claiming benefits past FRA (up until age 70), your benefit grows by 8%.
Filing too early could leave you with less money to cover retirement expenses, which might become more costly than expected.
2. Relying on COLAs to Beat Inflation
Social Security benefits are eligible for cost-of-living adjustments (COLAs), which are intended to help recipients keep pace with inflation. However, COLAs are meant to match inflation, not surpass it.
Don’t rely on them to improve your financial situation. If you’re struggling with living costs, increasing your non-Social Security income by working or reducing spending may be more effective. COLAs are not designed to boost your overall financial standing.
3. Assuming Social Security Is Enough for Retirement
Many retirees rely solely on Social Security benefits to fund their retirement, but it’s generally not enough. Social Security typically replaces only about 40% of your pre-retirement income, which is a significant pay cut.
Most retirees need 70% to 80% of their pre-retirement income to maintain a comfortable standard of living. Planning to live solely on Social Security can lead to financial stress. Consider building additional savings through IRAs, 401(k)s, or even side gigs to make sure you have enough for a comfortable retirement.
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