Social Security is a crucial part of retirement income for millions of Americans, providing lifelong, inflation-protected benefits. However, you could unintentionally reduce your Social Security payments by making a few common mistakes.
Here are three potential pitfalls that could shrink your Social Security checks without you even realizing it.
1. Retiring Before Working 35 Years
One of the biggest mistakes you can make is retiring before working a full 35 years. While you become eligible for Social Security after earning 40 work credits (typically by working 10 years), your monthly benefit is calculated based on your 35 highest-earning years.
If you work fewer than 35 years, the Social Security Administration (SSA) fills in the missing years with zeros. These zero-earning years will lower your Average Indexed Monthly Earnings (AIME), which directly impacts the amount you receive.
For example, having several zero-earning years in the calculation could result in a significantly lower Social Security check each month.
To avoid this, aim to work for at least 35 years. If you’re in the later stages of your career and earning more than you did in earlier years, continuing to work beyond 35 years can replace some of those lower-earning years with higher ones, further boosting your benefits.
2. Working While Collecting Social Security Before Full Retirement Age
If you start collecting Social Security benefits before reaching your Full Retirement Age (FRA), continuing to work could unintentionally reduce your benefits.
In 2024, if you’re under FRA and earn more than $22,320, you’ll lose $1 in benefits for every $2 earned over that threshold. Once you reach FRA during the year, you can earn up to $59,520 before losing $1 in benefits for every $3 earned.
While the SSA will recalculate your benefits at FRA to account for the months you missed payments, the process can take time.
This means you could be losing out on Social Security income in the short term, which can be a nasty surprise, especially if you’re relying on those payments.
However, once you reach full retirement age, there’s no limit on how much you can earn while receiving benefits. So, if you plan to keep working, consider delaying your benefits until you hit your FRA to avoid these reductions.
3. Moving to a State That Taxes Social Security Benefits
Most U.S. states don’t tax Social Security benefits, but nine states do under certain conditions. If you move to one of these states and your income is high enough, you could end up paying state taxes on your Social Security income. These states are:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- Utah
Moving to one of these states could be a costly mistake, especially if you aren’t prepared for the additional taxes on your Social Security benefits.
Before relocating, it’s important to consider the state’s tax policies and how they could impact your retirement income. Many retirees relocate to tax-friendly states to make their benefits go further.
Protecting Your Social Security Benefits
Being aware of these common mistakes can help ensure you maximize your Social Security benefits and avoid unnecessary reductions.
By working at least 35 years, being mindful of earnings limits if you claim early, and choosing your retirement location wisely, you can safeguard your benefits and ensure your financial security in retirement.
FAQs
What happens if I retire with fewer than 35 years of work?
Your Social Security benefit will be reduced because zero-earning years will be averaged into your benefit calculation.
Can I work while collecting Social Security benefits?
Yes, but if you’re below full retirement age, you may lose some benefits if your earnings exceed annual limits.
Which states tax Social Security benefits?
Nine states tax Social Security benefits, including Colorado, Minnesota, and Utah.
Will my Social Security benefits increase if I work more than 35 years?
Yes, if your later years’ earnings are higher, they will replace lower-earning years, increasing your benefit.
What is the full retirement age for Social Security?
For those born in 1960 or later, full retirement age is 67.
