Social Security errors that can cost you thousands

(MoneyWatch) Social Security benefits are the bedrock of most Americans' retirement security. So it's well worth your time to learn how to get the most from these valuable benefits -- and avoid making mistakes in how you collect them.

To help you in this endeavor, I checked with two of the nation's foremost experts on Social Security: Andy Landis, author of "Social Security: The Inside Story," and Jon Peterson, who wrote "Social Security for Dummies." Between Andy, Jon and I, we came up with four common errors that you should avoid and that will help you optimize your Social Security benefits.

Mistake #1: Starting retirement benefits too early
Half of all Americans claim Social Security at age 62, the earliest possible age with the lowest monthly benefit. But most workers can significantly boost their lifetime payout of Social Security income by delaying the start of their monthly benefits. By how long? At least until age 66, and to age 70 if you can wait that long. For many married couples, this strategy will also improve the financial security of widows who, when their husband dies, will step up to the Social Security income their husband was receiving before he died.

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I realize that many people lose their jobs and claim Social Security benefits early to make ends meet. But personally, I'd take any job that would pay me an amount equal to my Social Security benefits in order to reap the advantage of delaying my benefits as long as possible. I'd work at Wal-Mart (WMT), Starbucks (SBUX) or any other part-time job that pays enough to replace my Social Security benefits, while giving me enough free time to look for a better-paying position. In the long run, it's a financially smart move.

Mistake #2: Claiming Social Security now before program changes are made
"Some people think they must hurry to apply now, before Social Security runs out of money or before reforms make them ineligible," Landis said. "In fact, Social Security is projected to have the money it needs to operate at the current level for over two decades. And nearly all reforms on the table will apply to younger generations, not those currently retiring. So calm down and follow your best plan for claiming Social Security benefits."

Mistake #3: Not coordinating benefits for spouses
"Many people fail to coordinate claiming benefits with their spouse, and they miss opportunities for married couples to optimize their payouts," Peterson pointed out. These strategies usually entail starting Social Security benefits at different times for the husband and wife, whereas many married couples start their incomes at the same time.

One common strategy is to delay benefits as long as possible for the highest earner -- often the husband -- for the reasons described above. The wife might then claim benefits at an earlier age to have some retirement income coming in. Whether the optimal age to start the spouse's benefits is age 62 or age 66 (the official retirement age to collect full benefits) depends on your particular circumstances, such as the age difference and relative career earnings history of each spouse.

Two online services that can help married couples optimize their claiming strategies are www.socialsecuritychoices.com and www.socialsecuritytiming.com.

Mistake #4: Under-reporting of income by self-employed individuals
Many self-employed people under-report their taxable income for Social Security purposes, or use tax deductions to minimize their taxable income, on the assumption that paying any taxes is bad. But "This can hurt if you want Social Security benefits one day -- including disability benefits, in the case of unexpected illness or accident," Peterson said.

I know a number of self-employed people who've minimized their Social Security taxes over the years and are now reaching their retirement years with little or no retirement savings and severely reduced Social Security benefits. Now they regret this strategy and will need to keep working indefinitely.

According to one analysis, Social Security taxes are actually a good investment, so don't automatically think it's a good idea to avoid paying these taxes.

These are just a few of the mistakes that people routinely make in drawing Social Security. Stay tuned for future posts on how best to use the federal program.

It's well worth your time to learn all you can about Social Security benefits; it can result in increasing the lifetime payout for both you and your spouse by many thousands of dollars.

[OleNuke]

I have to agree that waiting until 66-70 could be more beneficial for some but most do need to start collecting earlier due to previously mentioned physical disabilities we live with on a daily basis. Sully28443 I think stated this very well. I swung a maul for years breaking apart excavation equipment after using a torch to burn off the bolt heads. Then on to reactor disassembly and large turbine disassembly and plant componenets for 35+ yrs.
Earlier days in the business management did not purchase the needed tooling that is in use today. If a guy worked the way we did in those days today he would be fired period. Good thing things changed for them.
Now back to us in our 60's. I plan on signing up at 62 as my physical condition is wrecked. Oh I still go the gym 3x a week just so I can keep moving. I retired in '08 after open heart, 3 shoulder surgeries, back fusion, 3 knee surgeries (No I didn't play sports wasn't allowed rheumatic fever at 8) but still worked consulting jobs hoping to increase my SS benefits. I'm still working now a PT job from home finally after working since 14 as 1 of 10 kids oldest male.
So only you can decide when to collect. You know your health condition or other life impacts. The ideal time, yes would be to wait for higher benefits but for those that never got dirt/grease under their fingernails they just don't get it.
When I got my first paycheck I do remember saying let me invest it. I would have done alot better than the government has done. Let it be a choice as I got when I left the Nuke's pension or lump. Give me the cash every time, if your dollar investment savvy. America this is where capitalism is king. Take care of oneself.

[2crystals]

Thank you Steve for helping me. I am 65 and signed up for Medicare. Does this in anyway diminish my Spousal
benifits? I intend to wait until 66 before I apply for spousal benifits. Appreciate you & your knowledge.
2Crystals

[seniorstylist21]

my husband is one of those hard working Laborers,25 plus yrs.he has built roads bridges,utilities ect.Great benefits including Health Ins.Over the last few years the deductibles and co-pays have risen with no end in sight. Four years agowe had a catastrophic motor=cycle accident.I had been employed with the same salon for 21 yrs.I was in a coma and had 7 surgeries and 24 days of rehab.Our top level 5 insurance dropped us to level 1 because we were on a motorbike.I was 50 .Disabled.disfigured,depressed,now medicare comes into the fold as SECONDARY as long as my husband works.most people don't realize you pay another deductable along with co-pays and original ins.deduct.when on soc.sec.disability.the deduct comes right out of your monthly SS check.politically speaking it p's me off when disabled people are accused of ENTITLEMENT,as if it's a bad thing.I was ambitious hard working for 44yrs.,loved my job now I'm a cripple and the ins.my husband paid into for over 25 yrs.let us with over 300'000.00 worth of debt plus more meds.I can't get any more operations that I need that are related to the accident.

[tramky]

The most important but least known argument for privatization of Social Security lies in the fact of what happens to your 30 or 40 years of work when you die before age 90. The great shell game that is Social Security shows itself then, when those 30 or 40 years of paying into Social Security (by both YOU and your employers) ends up as a $255 payout to some surviving family member. THAT is the great scam of Social Security. It is NOT your money, it is the Federal government's.

I will NEVER forget the story of the man who died suddenly, the day after he retired at age 66. This guy's wife had died 2 years previously at age 61. His one surviving son, an adult, got the $255 from Social Security. This reveals Social Security to be the massive slot machine it really is.

There is virtually NO real money underlying Social Security. The so-called trust fund was raided decades ago by Congress. Social Security is now based upon the full faith & credit of the United States. That really means its power to TAX and its ability--or lack thereof--to borrow money from foreign sources. That full faith & credit was given a lower rating a year ago, and may very well be lowered again THIS year, and unprecedented occurrence in the history of the United States.

You can wait until you're really old to collect Social Security if you wish, but this is not Pollyanna's world any longer--this is a world of bankruptcy and global jihad, where stupid dreams of the white picket fence and playing Bingo every other day are delusional.

Now, more than at any time since World War II, life is hard, then you die.

[venusvegasvada]

Mistake No. 1
-Your advise may be good for a white collar person who still has their health but for many blue collar people, it shows a fundamental lack of understanding. Their bodies are shot. Toast. They are lucky they made it to 62 in the first place. The real horror story here is that the govt. screwed them out of full retirement at 65. For many of them, waiting to hit 70 is frankly, a joke. They will be lucky to live that long.

Mistake No. 2
Your claim that everyone needs to calm down and that all the reforms being discussed only effect young people is utter BS. The fact is if you are 54 or younger, you should be absolutely terrified. Especially if your between 45 and 54. You've spent the best years of your working life. You can't go back. You paid in big time and are counting on getting what you put in. People in this age group have ZERO sense of humor about vouchers and will refuse to be thrown under the bus. I have yet to see ANY of the GOP, voucher pushing candidates get up in front of a crowd of 45 to 54 year olds and try and sell their BS to them. They won't do it for good reason.
Mistakes 3 and 4
Honestly, this is all sounds like it was done for some white collar person with multiple retirement income streams and all the fringe. It doesn't mean much for the down in the dirt, blue collar people. The bottom line is life will dictate to them when they have to retire and most likely, they will get what the system will give them at that time and they will be stuck with it. That's reality for them and THAT'S why Romney's and Ryan's plans are dead on arrival.

[askagain]

People can deny that Social Secdurity is in trouble and wait until the bottom falls out. Either we fix it now or run the risk of not being able sustain Social Security for future generations. Whatever happens, the solutions are apt to be painful.

[RetiredArmy_Nurse]

With 27 years between now and SS running out of money, the fix can be quite painless. Raising SS taxes by one half percent would shore up the system for decades. Raising the SS cap to $200,000 in addition would likely shore it up for the indefinite future. People need to quit being greedy and not whine about an extra $250 SS tax on $50K income. Step up America. We say we are patriots, but then do not do our patriotic duty to support a tax increase that would save the system. Do we hear grousing like this from Canada, Germany, France, Britain, etc. All these nations have systems far more generous and more expensive than ours. Do they complain? No, they do not.

[stevevernon]

Thanks RetiredArmy_Nurse for providing good answers to our readers.

Sully28443 -- I don't mean to pass judgment on people who are disabled and have no choice but to collect Social Security benefits as soon as possible. I only mean to encourage people who can still work that it might be in their best interest to work for a few more years, if they are able.

Best regards, Steve

[retiredgustav]

That all depends on whether you are a desk jockey or if you have a real job.

[RetiredArmy_Nurse]

Glad to see the point made that those who are self employed and take money under the table may find themselves in tough shape come SS payout time. I met a massage therapist who really had made quite a bit of money over her working life, but she chose to not report it. When it came time that she had to quit working due to old age, she got minimal SS payout of ~ $500 per month thanks to decades of not reporting her income and not paying SS taxes. She ended up living in one of the Central American nations where her savings (pretty good amount actually) and small SS check went a lot further. The downside is she became an expat thanks to her own greed over 40 years. She cheated the government, but in the end only cheated herself.

[john92021]

what about not contributing for 4 years before you collect, if you can get a job at Walmart (no medical) you don't make enough to contribute and it resets your average. These jobs also have a lot of people desperate to get them now and are not available. Only option is to be homeless.

[RetiredArmy_Nurse]

SS is calculated on your top 35 years of income. Making minimum wage the last few years does not "reset your average." Your SS payout can only go up, not down.

[jaykay3141]

Thank you, RetiredArmy_Nurse! There is far too much "myth-information" floating around. It's good to hear from someone who understands how the system works.

[albertj829]

I though the article was pretty informative but I don't agree with waiting until you are 66 or 70 to start collecting benefits. Articles in the past have advised taking you benefits early. In the long run, you will collect more of you benefits. The other thing, I have always had an inkling that the government wants you to wait, hoping that you will die or die early and not collect what you are entitled to.

[RetiredArmy_Nurse]

No, in general you will not collect more by collecting early. If you die early, that might be the case, but with SS break even payback at only ~7 years (counting both your contribution plus employer match) for most people that is unlikely. I figured out that waiting until age 70, I should net an extra quarter million bucks in SS payout. I've seen articles recommending early payout, but do the math. They are all wrong.

[jaykay3141]

Albert, the math is unfortunately more complicated than simply adding up benefits over how many years you expect to receive them. To be reasonably accurate you have to do what's called a "future value" calculation which takes into account that taking benefits earlier gives you a lower payment but it extends over more years. You also have to figure out what you'll forgo by stopping work early or what you'll be taxed if you collect while still working. That's not something you can handle with a calculator and paper, so you either need to talk to a professional advisor or track down a decent on-line estimator.

My background is heavy in math so I let my inner geek run loose by building a financial model. (Note: my assumptions were vetted by a friend who's an actuary.) Interestingly enough it turned out that in my particular situation there was hardly any difference in total returns over a range from age 65 to about 68. Outside of that range though, the numbers were a lot lower. But as the ads say: Your results may vary :)

[albertj829]

I though the article was pretty informative but I don't agree with waiting until you are 66 or 70 to start collecting benefits. Articles in the past have advised taking you benefits early. In the long run, you will collect more of you benefits. The other thing, I have always had an inkling that the government wants you to wait, hoping that you will die or die early and not collect what you are entitled to.