Social Security benefits remain a crucial source of income for many retirees, but missteps in planning can significantly reduce their effectiveness. Financial experts highlight three common errors that can undermine retirement security: claiming benefits too early, neglecting tax implications, and failing to budget for cost-of-living adjustments.
Early Withdrawals: A Permanent Reduction
The Social Security system allows individuals to start receiving benefits as early as age 62, but this comes with a cost. For those born between 1943 and 1954, retiring at 62 instead of 66 reduces monthly benefits from $2,000 to $1,500. Brian Sexton, CEO of Sexton Advisory Group, warns that many retirees file early without understanding the long-term impact. “This permanently reduces their monthly benefit for life,” he says. Early claims can lead to financial strain later, especially as medical expenses rise with age. Sexton advises coordinating Social Security with other retirement accounts, taxes, and spousal benefits. Delaying benefits by even a few years can dramatically improve long-term security.
Poor Tax Planning: Unanticipated Tax Bills
Retirees often overlook that Social Security benefits may be taxable. The IRS calculates tax liability based on combined income, which includes half of Social Security benefits plus other income. For single filers, if this total exceeds $34,000, up to 85% of benefits are taxable. Between $25,000 and $34,000, up to 50% is taxable. Withdrawals from 401(k)s or traditional IRAs can push retirees into taxable territory. “Many are shocked to learn their benefits can be taxed,” Sexton notes. Proactive planning, such as coordinating withdrawal strategies, can minimize tax consequences and prevent financial strain.
Bad Budgeting: Ignoring Cost-of-Living Adjustments
The Social Security Administration annually adjusts benefits for inflation through cost-of-living adjustments (COLAs). However, retirees often fail to account for these fluctuations in their budgets. Certified financial planner Vincent R. Birardi of Halbert Hargrove emphasizes that COLAs require smart spending. “Budgeting for inflation’s impact and factoring in adjustments helps ensure savings last a lifetime,” he says. The ever-changing nature of benefit payments underscores the need for a disciplined budget. Birardi recommends using educational resources from the Social Security Administration and consulting a Certified Financial Planner to tailor claiming strategies to individual circumstances.
This article is sponsored by Credit Karma. We may earn a commission if you engage with their services using links in this article.
