Tens of millions of retirees rely on Social Security benefits to support their income needs. For many, these monthly checks are a critical lifeline during retirement.
To ensure you’re maximizing your benefits and securing your financial future, it’s essential to understand how Social Security works and avoid making common mistakes. Here are three major Social Security errors that could affect your retirement.
1. Failing to Find Out Your Full Retirement Age
The earliest you can file for Social Security retirement benefits is at age 62. However, if you want to receive your full, unreduced monthly benefits, you must wait until you reach your full retirement age (FRA). The age at which you reach FRA depends on the year you were born.
Here’s a breakdown of Full Retirement Age by birth year:
1943 to 1954: 66
1955: 66 and 2 months
1956: 66 and 4 months
1957: 66 and 6 months
1958: 66 and 8 months
1959: 66 and 10 months
1960 or later: 67
If you file for benefits before your FRA, your monthly payments will be permanently reduced. For example, if your FRA is 67 and you file at 65, you could see a reduction of more than 13% of your monthly benefit.
This could significantly impact your financial stability, especially if you don’t have enough retirement savings to compensate for the shortfall.
2. Not Understanding How Much Replacement Income to Expect
Many people mistakenly believe that Social Security will replace most of their pre-retirement wages. In reality, if you earned an average income throughout your career, you can expect Social Security to replace about 40% of your pre-retirement income.
For most retirees, that’s not enough to cover their expenses. On average, you’ll need around 70% to 80% of your former income to maintain a comfortable lifestyle. That means you’ll likely need to supplement your Social Security benefits with savings from other sources, like your 401(k), IRA, or personal investments.
Understanding how much income Social Security will provide is crucial for building a comprehensive retirement plan. Once you know your expected Social Security benefits, you can calculate how much additional savings you’ll need to maintain your desired lifestyle.
3. Assuming Social Security COLAs Will Keep Pace with Inflation
Social Security benefits receive an annual cost-of-living adjustment (COLA) to keep up with inflation. However, the COLA may not fully cover the increase in living costs that retirees face, particularly in areas like healthcare.
From 2010 to 2024, the Senior Citizens League reported that Social Security recipients lost about 20% of their purchasing power due to COLAs failing to keep up with the actual cost increases.
This is partly because the COLA is based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which does not reflect the spending patterns of seniors, who tend to spend a larger portion of their income on healthcare.
As a result, COLA increases may not be enough to cover rising costs for retirees. That’s why it’s crucial not to rely solely on Social Security adjustments to keep up with inflation. Instead, continue to save and invest during your working years to build a buffer for unexpected cost increases during retirement.
The $23,760 Social Security Bonus Most Retirees Overlook
Many retirees don’t realize that by taking advantage of little-known Social Security strategies, they can increase their retirement income by as much as $23,760. These “Social Security secrets” include delaying benefits, coordinating spousal benefits, and understanding tax implications.
