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Social Security REGRETS: The Top 5 Mistakes Retirees Make · Retirement Answers

• 0:00
  Jacob: Taking Social Security at the wrong time can cost you thousands of dollars over your lifetime if you don't know what you're looking for. Everything from higher taxes to longevity risk to earning too much money can hurt you. But the problem is, is most retirees don't know what to look out for. So in today's episode, I'm sharing five social security mistakes that retirees make so you don't make the same mistakes yourself. Hey, friends, welcome back to another episode of Retirement Answers.
• 0:26
  My name is Jacob Duke. I'm a certified financial planner and the owner of a retirement planning firm where we help people just like you plan smarter and retire better and something that is a part of every retirement income plan is your Social Security. But I've seen the mistakes that can be made when claiming Social Security when you don't consider your entire plan. So let's talk about these mistakes so you know what to be on the lookout for. The first mistake is claiming too early and I'll be honest, this one is understandable, right?
• 0:56
  You've worked really hard, you've saved and you've put money away and you paid in your social security taxes along the way while you've worked and you're like, man, I wanna get this money while I can. I don't know how long I'm gonna be here. I don't know how long I'm gonna live. I don't know when my health is gonna deteriorate. I want to get what I can while I can, even if I might not need the income, I wanna take it and then reinvest it.
• 1:16
  And while I understand this line of thinking, it might not help you long term in the grand scheme of things when it comes to your entire retirement plan rather than just getting your benefits started early. Because on its face, starting those benefits early and starting that income stream sooner doesn't seem like a bad idea until you consider what else it might affect. For example, what about Roth conversion opportunities? Maybe you need to do Roth conversions to help lower your future RMDs or future taxes later on down the road for yourself or a survivor if you're married, right? You have this potential opportunity to do tax planning now and take advantage of the early years, what we call your gap years by doing conversions at lower tax rates.
• 1:57
  And so if you go ahead and start your benefits today at 62, because you can, it might take away from the opportunities of Roth conversions that you might have now, because those benefits, your Social Security benefits will be taking up a portion of those lower income tax brackets, which again, would limit or reduce how much you otherwise could have converted in those Roth conversions. So that's one thing to think about. Now, another thing to think about here is instead of doing Roth conversions to help your future taxes, what if you could spend more of your tax deferred money right now at a lower tax bracket by doing the same thing? So instead of doing the Roth conversion up to the 12% bracket, what if you spent out of your traditional IRA or traditional four zero one ks up to the 12 bracket to create your living expense needs right now before you turn on Social Security? And by doing something like this, this is more of a spend down approach rather than a Roth conversion approach in terms of tax planning, so that you can enjoy your money today.
• 2:52
  That's a big deal. But then also too, you can intentionally by spending more of the account today, you can reduce your RMDs in the future rather than doing Roth conversions. And this might apply for someone who doesn't have a brokerage account or doesn't have any other outside accounts that are after tax money. So instead of doing Roth conversions and withholding the taxes, then have to either have Social Security or have to have other distributions out of those same IRAs for living expenses, you could just simply avoid Roth conversions entirely and then spend out of those tax deferred accounts. But again, if you start that Social Security too soon, it could limit your opportunities there and how much you could take out of those tax deferred accounts at that 1012% rate.
• 3:32
  So in general, taking your benefits early could limit or hurt your ability to do some tax planning early on in retirement during your gap years. Again, those are the special years whenever you can do the most tax planning for the future and reduce your lifetime tax bill. And then finally here by taking too early, it's simply going to hurt your lifetime earnings as well, right? If you live to 85 plus, you're gonna get less benefits over your lifetime compared to had you delayed to, let's say 67 or perhaps even 70. But again, we'll talk more about longevity here in just a moment.
• 4:03
  The second mistake is ignoring or not understanding Social Security spousal benefits and how they worked. And now, I've talked about this at length in other episodes, I'll have those linked down in the show notes for you to listen to if you'd like, but when it comes to spousal benefits, there's a few things you have to understand. If you take your benefits before your full retirement age, you will get a reduced spousal benefit. So, you have to know here is if you take your benefits at your full retirement age, you're going to get 50% of your spouse's PIA if their amount is higher than yours. If 50% of their PIA would be higher than your own benefits, you would get a spousal benefit added on to your own personal benefits.
• 4:44
  Now, again, if you take your benefits too soon, too early, let's say it's 62, instead of getting 50% of their PIA, you would only get 32.5% of their PIA, and that might actually eliminate any spousal benefit opportunities you could have because your benefits could be greater than that 32.5% of theirs. So you have to understand how when you claim your own benefits impacts your opportunities around spousal benefits, and most people aren't aware of how those two things interact. And then whenever you start to consider things like survivor benefits, you have to think about what your spouse would get if you are married, and is there a big difference between your own benefits and theirs, and is there a big age gap and would it make sense for you to delay yours if you have a much higher benefit, and actually increase their survivor benefit should you predecease them? Again, these are things that you've got to consider because it's not so much about just getting the maximum for you and yourself and your own benefits, especially if you're married, you've got to consider your household benefit amount and your entire lifetime benefit amount for you and your spouse, instead of just thinking about yourself.
• 5:49
  So that's where these spousal benefit rules and provisions and also survivor benefit rules, they come into play and they have to be considered within the full picture rather than just focusing on your own benefits and trying to get what you can while you can or maximizing just for yourself, you've got to think about your entire household. The third mistake is taking your benefits early and then earning too much money resulting in a reduction of benefits. Now, here's a few things to know about this. If you take your benefits at 62, and then you have earned income, you could be earning too much money, which would reduce how much your benefits would actually be. And so what I want to do right now is actually explain the twenty twenty five earnings limits for this provision in this rule.
• 6:31
  So here's what you need to know. Number one, if you are at your full retirement age already or older, you can earn as much money as you want to make and still be receiving your benefits and you're not going to have any reduction. So let's say you're 68 years old, you make a $100,000 because you're still working and then you also get your Social Security benefits of 3,000 a month. Well, guess what? No matter how much money you make, you can still get your 3,000 a month from Social Security without reduction because you are already at your full retirement age or older.
• 7:00
  Now, here's what you need to know if you are under your full retirement age. If you are not yet to full retirement age and you're receiving your benefits and you're still earning money, as soon as you have more than 23,400 of income in 2025, you will have a reduction in your Social Security benefits based on the amount of money you have above that 23,400. So if you've got a $30,000 income and you're receiving Social Security benefits and you're, let's say 63, you would be under full retirement age and you're also getting social security benefits, okay? And then you have more than this $23,400 threshold. So what happens here is for every $2 that you have over the limit, dollars 1 is withheld from your benefits.
• 7:46
  Okay, so for every $2 over the $23,400.01 dollar is being withheld or subtracted out of your benefits in that given year. So this is for anyone who's under full retirement age, that's the income limit and it's quite low. Okay, so you can earn very little money before you start having your benefits reduced. Now, if you reach your full retirement age within the calendar year, okay, that you are also working and you have your benefits turned on, so let's say you're 66 and your full retirement age would be 67 later this year, you can earn a higher income in that particular year, that one year that you would reach your full retirement age, you can earn more money than the income limit I just described. In that particular year, so just one year for anybody out there, it's just one year, a period of time that this could be true, but the income limit is $62,160 So it's about almost not quite, but it's almost triple that of the other income limit I just described for those of you who are not yet going to be at full retirement age here in 2025.
• 8:48
  So that's for this year 2025, these income amounts are actually increasing slightly every year, but if you are reaching your full retirement age this year, your income limit is 62,160, okay? And then on top of that, for every $3 over that limit, okay, so every $3 over the $62,000 limit, $1 would then be subtracted or withheld from your benefits that particular year until the month that you reach for retirement age. So these things are very important to understand because if you're someone who's like, hey, I'm going to keep working, but I'm going to try to get my benefits while I can, because again, my health maybe isn't the best, Guess what? You might not end up with any benefits if you're making too much money based on how your benefits could be reduced depending on how much income you have and when you're turning full retirement age or not. So you've got to understand these different income limits and rules, but here's what I do want to say is that you don't necessarily lose out on the money that's being withheld.
• 9:42
  Okay, they actually would be repaid back to you. But here's the catch, they're not repaid back to you as soon as you get to 67 or your full retirement age. What happens here is your delayed benefits, what you're giving up by having earned income while you're still receiving benefits before 67 or your full retirement age, you're gonna earn those back over the rest of your lifetime. So what happens here is if you do have a reduction in benefits, your PIA, primary insurance amount, again, I've talked about this in other episodes, it's actually going to be recalculated, okay, and effectively your benefits will be paid back over your lifetime. So for example, let's say that you have had $20,000 of your benefits withheld because you've earned a little bit of income and you had your benefits turned on and they were over the income limit.
• 10:26
  So $20,000 is how much you had withheld because of these rules. That $20,000 that is not paid back to you as soon as you reach your FRA. That $20,000 is effectively spread over the rest of your life expectancy from your full retirement age on because your PIA is being recalculated with that $20,000 then added in, and so it's effectively being annuitized out over the rest of your life, which is in my opinion, not very helpful because you're getting like a dollar a month for the rest of your life in order to get that paid back as opposed to 20,000 today in your hand, that could be more helpful than spread out over your lifetime. So not only are you having the benefits withheld, meaning you don't get to actually use and receive those, those benefits are actually being recast over your lifetime once your PIA is recalculated. So again, this is a common mistake that I see someone trying to take their benefits early to get what they can, not realizing that they would be reduced if they're still working or earning above these income limits.
• 11:22
  So pay attention to that as you decide on your claiming strategies. The fourth mistake here is not understanding how social security taxation works, and assuming that all income and retirement is going to be taxed the same. Now I've done so many conversations and episodes and YouTube videos on Social Security taxation, because again, it's something that very few people understand. But once you do understand, you can see how really good planning actually makes a big impact from a tax saving standpoint throughout your life in terms of when you decide to take your benefits and what other income you can have alongside those benefits and how if you have no income outside of your benefits at all, you're gonna pay no taxes on those benefits regardless of how much you're getting every single month. And so what I want to hit on really quickly here with Social Security taxation is that there are a lot of nuances.
• 12:07
  There are important things to know, but here's here's the main things. At most 85 of your benefits would ever be subject to taxation. Not all of your benefits are going to be taxed at most 85% could be taxed. Now, here's the thing, none of your benefits could be taxed if social security is your only form of income in retirement. Okay, I'm gonna repeat that.
• 12:30
  If Social Security is your only form of income in retirement, you're gonna pay no taxes on those benefits regardless of how much they are. And this all comes down to how the taxes on your Social Security benefits are going to be calculated. So you have to find what's called your provisional income, and you have to run that through the provisional income tax brackets, and then you can use that number, which is your taxable social security amount to add into your other forms of income to determine how much your true AGI or taxable income is. So again, there's so many different things here, I'm not going to dive deep into it, I've done episodes, I'll try to link those below as well, where you can learn a lot more specifically about Social Security taxation, but not understanding this is a problem when you think that you can use half of your social security for your income and then half of your IRA distributions for what you need. It might be actually better to use your IRA only your only source of income for a couple of years, and then if you delay it, grow the benefits, and then you need less money of your IRA in the future, you could distribute money out of your IRA today, right?
• 13:30
  Without having yet taken your benefits so that your IRA is your only source of income, use the 1012% brackets and those large standard deductions that we now have, especially if you're 65 or older. Okay, so you can take money out of your IRA at these lowest tax brackets, delay your Social Security, continue building and growing the benefits, and then once you get to 67 or 70, you can then turn on your Social Security benefits, and then you can take minimal amounts out of your IRAs at higher brackets, and so most of your social security would be tax free in that scenario, but then also minimal amounts of your IRAs could also be tax free as well. So structuring and organizing when you take your benefits and how that relates to your other income sources is crucial. And by thinking through this and planning thoughtfully, you could result in a favorable tax situation for the IRA and Social Security as I just described. So you gotta understand how Social Security taxation works and how it coordinates with other income sources.
• 14:24
  And the fifth mistake I want to highlight today is not understanding how your COLAs, your cost of living adjustments, could benefit you more by having a higher benefit because you delayed. So for example, you know, if you have a 2% annual COLA, we'll just use that as kind of our base average moving forward, dollars 3,000, let's say is your benefit this year, you get a 2% adjustment upwards, while 2% of 3,000 is higher than two percent of 2,000. Let's say if you'd started your benefits at 62, rather than delaying them into the future to get more out of the Social Security system. So your cost of living adjustments actually continue to perpetually help you have higher benefits if you delay even further to have that higher starting amount. So a lot of people don't think about this, but if you can find a way to delay your benefits, you could end up having, more and more in dollar terms adjustments upward because that COLA, the percentage would be applied to a higher dollar amount every single year compared to that lower dollar amount.
• 15:23
  So these are five mistakes. I know there's kind of a lot wrapped up in this and we can't really cover them all in-depth, but hopefully they give you some perspective on things to look for and look out for as you're deciding when to claim Social Security and when you should maybe be doing that holistically within your plan from an income planning standpoint, a tax planning standpoint, but also a family planning standpoint. Because if you are married, and you're not considering your spouse and your total lifetime benefits for both of you combined, you're probably going to be missing out on something from a spousal or a survivor benefit standpoint, and also too, you could be giving up if you take early, you could be giving up opportunities to do tax planning, which would reduce the potential tax burden on a surviving spouse under that widow's tax trap, if you have a lot of tax deferred money. So lots to consider here. These are the conversations we have with our clients every time we're deciding on these things and kind of evaluating the pros and cons and decision points and hey, what should we do and why, what's the best of the options for them specifically.
• 16:21
  If you're looking for help deciding on what to do with your Social Security benefits or needing a full plan built and kind of how Social Security fits into that, then reach out. There should be a link down in the description below for you to go book a call with me directly. It's completely free. It's just an intro conversation to see if we might be a good fit to help serve you. Other than that, I hope you have a great rest of your day.
• 16:41
  Thanks for tuning in. We will see you next week. Hey, it's Jacob again, and I wanted to remind you that nothing discussed in today's episode is meant to be financial, legal, or tax advice. Retirement Answers is for educational purposes only. Thanks for tuning in to this week's episode.
• 16:57
  I look forward to talking with you again next week.