Social Security benefits can be a lifeline in retirement, bridging the gap between what you have saved and what you need to afford a comfortable lifestyle.
However, many retirees may be unknowingly sabotaging their monthly checks. Approximately 37% of baby boomers say they expect Social Security to be their primary source of income in retirement, according to a report from the Transamerica Center for Retirement Studies. If you have similar plans, it’s especially important to ensure you’re aware of a few of the ways you could potentially lose your benefits.
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1. Working fewer than 35 years
To qualify for Social Security benefits, you typically have to have worked and paid Social Security taxes for at least 10 years. However, if you’ve worked fewer than 35 years by the time you begin claiming benefits, you could receive smaller checks.
The Social Security Administration calculates your basic benefit amount — or the amount you’ll receive by claiming at your full retirement age — by taking an average of your income over the 35 highest-earning years of your career and then adjusting it for inflation.
If you haven’t worked a full 35 years, you’ll have zeros added to your equation to account for the years you weren’t working. That could bring down your earnings average, which in turn will reduce your benefit amount.
2. Not taking advantage of all the types of benefits you’re entitled to
When you think of Social Security benefits, you may think primarily of retirement benefits. However, there are other types of benefits you may be entitled to, including spousal benefits, divorce benefits, or survivors benefits.
If your spouse is the higher earner in the household and is eligible for Social Security benefits, you may be eligible to collect spousal benefits. The maximum you can receive in spousal benefits is 50% of the amount your spouse is entitled to collect at his or her full retirement age. Similarly, if your ex-spouse is entitled to benefits, you may be able to claim divorce benefits based on his or her work record as long as you two were married for at least 10 years and you are not currently married.
If you’re eligible for Social Security benefits based on your own work record as well, the Social Security Administration will pay out your benefits first. Then, if you’re entitled to more money in spousal or divorce benefits, you’ll receive a little extra each month.
Survivors benefits are typically available to widows and widowers age 60 and older, but children, parents, and other family members who were financially dependent on the deceased are also sometimes eligible for these benefits.
3. Forgetting about Social Security taxes
Even though you’ve been paying into the Social Security program for years, Uncle Sam will still try to take a chunk of your benefits through state and federal taxes.
Whether you’ll owe state taxes on your benefits depends on where you live because each state has slightly different laws. Some states won’t tax your benefits at all, while others may provide exemptions depending on your income.
For federal taxes, how much you’ll owe will depend on your “combined income,” which is half your annual benefit amount plus your other sources of income (excluding Roth IRA withdrawals). If you have a combined income of more than $34,000 per year (or $44,000 per year for married couples filing jointly), you’ll owe federal taxes on up to 85% of your benefits.
While you may not be able to avoid taxes on your benefits, you can do your best to plan for them so you’re not taken by surprise once you retire.
How to make the most of your benefits
Social Security benefits are an integral part of many Americans’ retirement plans. It’s wise to take full advantage of them. By ensuring you’re working enough years to collect your full benefit amount, filing for all the different types of benefits you’re eligible for, and accounting for taxes in your retirement plan, you’ll be on your way to achieving a more financially secure retirement.