This Is 1 of the Worst Social Security Mistakes You Can Make

Key Points

• As important as it is to claim Social Security at the right time, it's even more important to know what to expect from your benefits.

• Assuming Social Security will replace your pre-retirement paycheck is an unwise move.

• Figure out what monthly benefit you're in line for and save as well as you can to make up the difference.

• The $23,760 Social Security bonus most retirees completely overlook ›

There's a reason many people stress over when to sign up for Social Security. Filing for benefits at the wrong time could leave you with a serious income shortfall throughout retirement.

Some people might say that claiming Social Security at 62 is a poor choice, since it means reducing your benefits for life. But while it makes sense for some people to wait until full retirement age to sign up for Social Security, filing early could be a better choice for others.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Continue »

Image source: Getty Images.

It's important to put a lot of thought into your Social Security filing age so you don't make a bad decision. But claiming benefits at the wrong time isn't even the worst Social Security mistake you might make. There's an even bigger blunder you may fall victim to that could hurt your retirement finances in a serious way.

Don't overestimate your Social Security benefits

One big misconception about Social Security is that it's designed to replace your pre-retirement wages in full. In reality, Social Security will only take the place of about 40% of your pre-retirement paycheck. This assumes that you're an average earner, and that benefits aren't cut broadly, which may happen within the next decade.

Meanwhile, it's common for retirees to need 70% to 80% of their former paycheck to maintain a comfortable lifestyle. You may be able to get away with less if your home is paid off, you live in a fairly low-cost part of the country, and you're content to spend time in your neighborhood rather than splurge on expensive activities and trips.

But it may not be reasonable to try to live on just 40% of your former paycheck. You could try to do it. But there's a good chance you'll end up miserable. That's why it's so important to get a solid handle on what to expect out of Social Security.

Estimate your benefits and pledge to save

There's an easy way to figure out what Social Security will pay you in retirement. Just create an account at SSA.gov and look at your most recent earnings statement. It should contain an estimate of what Social Security will pay you at different ages.

Once you have that number, you can try to estimate your monthly retirement expenses. If you see that there's a big gap, you'll know that you need to start saving for retirement immediately.

For example, if you spend $5,000 a month now and think you'll be able to get away with $4,000 a month in retirement, you'll need a solid nest egg if you're only looking at $2,400 per month in Social Security. The sooner you get that information, the more motivated you might be to begin contributing to an IRA or 401(k) plan.

While botching your Social Security claim is clearly something you do not want to do, not understanding how much money to expect from your monthly benefits is just as problematic, if not more so. If you overestimate your benefits, you might neglect your savings and end up with a serious cash flow problem later in life. It's better to get all of the information now so you can formulate a retirement savings strategy that works for you.

The $23,760 Social Security bonus most retirees completely overlook

If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income.

One easy trick could pay you as much as $23,760 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Join Stock Advisor to learn more about these strategies.

View the "Social Security secrets" »

The Motley Fool has a disclosure policy.