HISTORICAL FACTS: Three common social security mistakes that retirees make - The Untold Story

The Independent reached out to multiple financial professionals to identify the top Social Security mistakes that retirees make, the impact and how to avoid them.

Early withdrawals

The Social Security system is designed to provide most retired workers a steady income once they hit retirement age - anywhere from 66 to 67 years old, depending on when the recipient was born.

However, the system allows people to start their monthly payments as early as 62. That decision comes at a cost, though. Those born from 1943 to 1954 would earn $1,500 of a $2,000 benefit if they retired at 62 instead of 66, according to the Social Security Administration.

While accessing payments before retirement age may be the right choice, it can be a big mistake for others, said Brian Sexton, CEO of financial advisory firm Sexton Advisory Group.

“One of the biggest mistakes I see is people filing for Social Security the minute they become eligible at 62 without fully understanding what they're giving up,” Sexton said in an email to The Independent. “I understand why it happens … but in many cases, the decision permanently reduces their monthly benefit for the rest of their life.”

Getting benefits early can cause financial strain later in retirement, especially if someone lives longer than they anticipated. The older they get, the higher their medical expenses become.

“I've worked with retirees who claimed early and then later realized they underestimated how long they'd live or how expensive retirement would actually be,” Sexton said.

While retirees usually can’t reverse the impact of an early-withdrawal mistake, they can avoid it by planning in advance of retirement.

“Social Security shouldn't be viewed in isolation,” Sexton said. “It needs to be coordinated with your retirement accounts, taxes, income needs, health, and even your spouse's benefit strategy. Sometimes delaying benefits by even a few years can dramatically improve long-term retirement security.”

Poor tax planning

Retirement taxes can be complex even if someone of retirement age isn’t working. That’s because the government calculates tax liability based on income earned, nontaxable interest, income that’s not included in federal income taxes, and half of a recipient’s Social Security benefit.

If all those add up to more than $34,000 for a single filer, up to 85 percent of their Social Security is taxable. That tax rate drops to 50 percent when all income is between $25,000 and $34,000. Those who bring in less than $25,000 will pay no tax on their Social Security.

“A lot of retirees are shocked when they hear their Social Security benefits can actually be taxed,” Sexton said.

A retiree may take their Social Security benefit, then make withdrawals from a 401(k) or traditional IRA. All three of those sources are considered income, and taking too much from a 401(k) or traditional IRA could push a retiree’s income past $25,000 and result in taxation.

“In some cases, retirees unintentionally create a much larger tax bill than expected,” Sexton said. “I've seen people who were technically doing well financially but still felt squeezed when they weren't managing taxes efficiently.”

Creating a tax strategy that lowers tax liability is a good way to avoid unnecessary tax payments.

“This is where proactive planning really matters,” he said. “We spend a lot of time helping clients coordinate withdrawal strategies so they're not creating unnecessary tax consequences.”

Bad budgeting

Each year, the Social Security Administration increases benefits to keep up with inflation. These increases are known as “cost-of-living” adjustments, and they tend to vary from year to year.

Not accounting for these increases is a common misconception retirees have about their Social Security benefit, said certified financial planner Vincent R. Birardi, a senior wealth advisor at Halbert Hargrove.

While the yearly increase can help retirees keep up with the rising cost of living, it also requires smart spending. Budgeting for inflation’s impact on monthly expenses, then factoring in cost-of-living increases, will help retirees manage their money well. When that happens, they improve the chances that what they’ve saved will last them the rest of their life.

The ever-fluctuating nature of Social Security benefit payments (and thus your household income) underpins the importance of creating and sticking with a spending budget to help ensure a comfortable retirement,” Birardi told The Independent in an email. “If you are approaching your retirement years, these are important factors to consider now, as they might impact when you take Social Security.”

Education is a good way to avoid surprises in retirement, whether good or bad. The Social Security Administration’s website has helpful learning material, Birardi said.

“You should also consider speaking with an accountant or Certified Financial Planner for determining when to claim, given your own personal circumstances, namely your income and expenses both present and in the future,” he said. “This is too important of a decision to make on your own. ”

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