The Biggest Social Security Mistakes Retirees Make in Their First Year

Social Security benefits are often a critical source of income for seniors, many of whom depend on these benefits to supplement income from retirement plans. Unfortunately, there are many confusing rules related to Social Security benefits that far too many retirees don't really understand.

Sometimes, seniors find out about these complicated rules and regulations only after they've actually retired and begun claiming their benefits. This could lead to costly errors or decisions they later regret. To make sure this doesn't happen to you, be aware of these common Social Security mistakes seniors often make in their first year.

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1. Not understanding tax rules

One huge mistake many retirees make in their first year relates to not understanding the tax rules that apply to their Social Security benefits.

See, Social Security benefits may be partially taxable once provisional income exceeds a certain threshold. Provisional income is half of your Social Security benefit, all of your taxable income, and certain types of non-taxable income. As soon as your provisional income exceeds $25,000, you'll start to be taxed on part of your benefits if you're a single tax filer. If you're a married tax filer, taxes kick in once your income exceeds $32,000.

If you aren't aware of this, you may be surprised to find that you owe tax on Social Security and don't get to use the entire amount of your benefits. You should have a plan for paying your taxes, and make sure you know how much money will be left over after the IRS gets a cut.

If you don't want to worry about owing tax on Social Security, you can also choose to invest in a Roth IRA, or Roth 401(k) as qualified distributions from a Roth don't count toward your provisional income.

2. Working without knowing if benefits are affected

Retirees who claim Social Security for the first time could also make another big mistake in their first year of receiving benefits. They could decide to work without understanding the implications.

If you have reached your full retirement age before claiming Social Security, you don't have to worry about work rules, as you can work and earn as much as you want. But if you haven't reached FRA, you may temporarily forfeit some Social Security benefits if you earn too much.

If you won't reach FRA all year, you lose $1 in benefits for every $2 above $24,480. If you will reach FRA later in the year but are working before your birthday, you lose $1 in benefits for every $3 above $65,160. Eventually, once you finally reach full retirement age, benefits are adjusted and increase based on the number of months you didn't get a benefit.

While you eventually get the money back from Social Security (assuming you live long enough for your higher recalculated benefit to make up for the years of retirement checks you missed), you still may find yourself frustrated to be unable to earn a paycheck and your full Social Security at the same time if you're under FRA.

3. Assuming Social Security benefits will go further than they do

Finally, another huge mistake seniors make in their first year of collecting Social Security is assuming that their benefits will go further than expected. The reality is that living comfortably on these benefits isn't likely, as you are typically only going to replace 40% of pre-retirement income with your Social Security check. Most people require more than that.

To avoid this mistake, don't claim Social Security until you know the truth about what your benefits can do to support you. Otherwise, you could find yourself struggling for many years to come.

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