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5 Social Security Mistakes Seniors Can't Afford to Make

Social Security benefits are a retirement investment you accrue during your entire working life, and taking full advantage of them is integral to any retirement planning strategy. In 2022, the Social Security Administration took the step of adding a 5.9% cost-of-living adjustment which will result in about 70 million beneficiaries receiving larger monthly checks.⁸

However, many people are unaware of the many misconceptions associated with Social Security benefits. For this reason, it's important to consult a fiduciary financial advisor. These financial experts can take an unbiased look at your retirement plan and help you determine where Social Security benefits fit into your overall strategy.

A 2021 Northwestern Mutual study found that 71% of U.S. adults admit their financial planning needs improvement. However, only 29% of Americans work with a financial advisor.¹

The value of working with a financial advisor varies by person and advisors are legally prohibited from promising returns, but research suggests people who work with a financial advisor feel more at ease about their finances and could end up with about 15% more money to spend in retirement.⁶

^{A recent Vanguard study found that, on average, a $500K investment would grow to over $3.4 million under the care of an advisor over 25 years, whereas the expected value from self-management would be $1.69 million, or 50% less. In other words, an advisor-managed portfolio would average 8% annualized growth over a 25-year period, compared to 5% from a self-managed portfolio.7}

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1. Not maximizing your earnings

Your Social Security benefits are directly correlated to how much you pay into the system, so it’s important to earn as high a salary as possible throughout your career. In 2021, employees will pay 6.2% tax on up to $142,800 of wages.

2. Working less than 35 years

The government calculates your final benefit amount based on your lifetime earnings, averaging your salary over the course of the 35 years when you made the most. Since salaries change over time, the SSA refers to the Average Wage Indexing Series, but factors in zeros for every year you are short of the 35-year mark.

3. Accepting Benefits As Soon As They're Available

The earliest you can start receiving Social Security is 62 years old, and you’ll lose 30% of the benefits for that year. Your benefits at age 62, 66 or 67 are not your maximum benefits, though. Benefits increase by 8% per year every extra year you wait until the maximum benefit kicks in at age 70.

4. Not considering your spouse’s benefits

You can delay claiming your own benefits and reap half of your partner’s payout if your marriage (current or not) has lasted for a minimum of 10 years (although several conditions apply). This can be beneficial if your spouse was a higher earner, since the calculation for spousal benefits will be based on the spouse’s salary. Widows and widowers are also able to benefit from a spouse whose earnings were higher.

5. Not planning with a financial advisor

Financial advisors are well-versed in Social Security planning and can help you determine when is best to elect your benefits and how to avoid tax traps. They can also help you figure out exactly how your benefits fit into your retirement income equation. Depending on how much you receive, this could help you rely less on tax-advantaged accounts, allowing them to continue compounding interest. 

Chances are, there are several highly qualified financial advisors in your town. However, it can seem daunting to choose one. 

Our no-cost tool makes it easy to find a reliable, reputable advisor so you can make an informed decision and choose the right one for you. Now you can get matched with up to three local fiduciary investment advisors that are vetted and subject to our due diligence criteria. The entire matching process takes just a few minutes.

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Sources:
1. Northwestern Mutual study
2. Value of a Gamma-Efficient Portfolio (2017), Morningstar Investment Management.
3. The Return on Advice (2016), Envestnet, Capital Sigma.
4. Value of a Financial Advisor Study (2017), Russell Investments.
5. Advisor Value (2014), Voya Retirement Research Institute.
6. Journal of Retirement Study
7. Vanguard (2019), Putting a Value on Your Value

SmartAsset’s no-cost tool simplifies the time-consuming process of finding a financial advisor. A short questionnaire helps match you with up to three local fiduciary financial advisors each, legally bound to work in your best interest. The whole process takes just a few minutes and advisors are vetted and subject to our due diligence criteria.

If you’re approaching full retirement age, you’ll soon be eligible to collect your Social Security benefits. Be sure to avoid these common pitfalls that could substantially affect how much you receive.

Assuming 5% annualized growth of $500k portfolio vs 8% annualized growth of advisor managed portfolio over 25 years. Source: Vanguard Research

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