3 Social Security Mistakes That Might Leave You Kicking Yourself

Key Points

Tens of millions of retired workers collect benefits from Social Security today, and for the majority of them, those monthly checks serve as a critical income stream. And chances are, once you retire, they will for you as well.

That’s why it’s so important to make sure you understand the ins and outs of Social Security and file for benefits strategically. With that in mind, here are three big Social Security mistakes you might kick yourself later for making.

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1. Not finding out your full retirement age

The earliest age at which an American can file for Social Security retirement benefits is 62. But you won’t get what the program calculates as your full monthly benefits unless you wait until what it defines as your full retirement age to file. If you don’t find out that key piece of information in advance, you may inadvertently sign up early, which would result in you permanently getting reduced monthly benefits.

You can use this table to find out your full retirement age based on the year of your birth.

Table by author. Source: Social Security Administration.

Some people, for example, might incorrectly think that 65 is their full retirement age because that’s when people typically become eligible for Medicare. But if your full retirement age is 67 and you sign up for Social Security at 65, you will permanently reduce the size of your monthly checks by more than 13%. If you don’t have a lot of retirement savings, that’s a hit to your finances that you may not be able to afford.

2. Not understanding how much replacement income to expect from your benefits

One of the biggest misconceptions about Social Security is that it’s meant to replace a majority of your pre-retirement wages. But actually, if you earned an average income over your working life, you can expect your Social Security checks to add up to about 40% of the paychecks you were bringing home.

For most seniors, however, it would take more like 70% to 80% of their former wages to cover their core expenses and leave them a reasonable amount beyond that to actually enjoy life. And while you may be able to retire comfortably on a smaller percentage of your former income if you choose a modest lifestyle, trying to get by on 40% of what you used to live on isn’t necessarily a smart move.

That’s why it’s important to understand how much replacement income you can expect from Social Security. Once you have a good handle on that percentage, you can figure out how much you’ll need from each year from other sources. You can use that number in turn to calculate what sort of balance you’ll need in your IRA, 401(k), or both (perhaps by using the 4% rule).

3. Assuming that Social Security COLAs will do the job they’re supposed to

Almost every January, Social Security beneficiaries are given an automatic cost-of-living adjustment, or COLA. The whole point of COLAs is to give those benefits a boost that matches the inflation rate of the prior year so that seniors’ checks keep up with their rising bills.

But due to a flaw in the way those COLAs are calculated, Social Security recipients often find that their yearly raises can’t keep up with the cost increases they face in practice. In fact, the Senior Citizens League, an advocacy group, says that between 2010 and 2024, Social Security recipients lost a total of 20% of their buying power due to insufficient COLAs.

Ever since those COLAs were instituted, they have been based on one specific measure of inflation: the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The CPI-W may be a good measure of broad inflation, but it fails to fully capture the impact of many of the costs older Americans face disproportionately compared to younger people. For example, they tend to spend more of their money on health care.

So groups like the Senior Citizens League have long urged lawmakers in Congress to make a change and base Social Security COLAs on a senior-specific index instead.

Because COLAs have long been a gradual letdown for Social Security recipients, it’s important to make sure that you will have retirement income you can count on beyond those benefit checks. Indeed, it’s all the more reason to push yourself to save and invest vigorously for retirement while you’re working.

The monthly benefits you will get from Social Security could end up being a financial lifeline during retirement. And avoiding these mistakes could help you avoid a situation where you’re struggling during a time when you deserve to be enjoying life.

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