The 3 Most Common Mistakes People Make When Filing for Social Security

Source: SSA Office of the Inspector General.

Social Security is a complicated program, but it's also incredibly important to many Americans' financial survival. That's why it's important not to make mistakes when it comes to filing for your Social Security benefits.

We asked three Motley Fool contributors to discuss some of the mistakes they've seen many Americans make with their Social Security and the ways you can avoid those pitfalls. If you're nearing retirement and thinking about Social Security, read on, and you may save yourself some money and headaches.

One common mistake people make when filing for Social Security is failing to understand the rules. About 40% of eligible Americans file for Social Security benefits the month they turn 62. What these people may not realize is that by filing before their full retirement age, they're accepting reduced benefits for the rest of their lives. (For those born in 1960 or later, full retirement age is 67. It's 65 for those born in 1937 or earlier. For those born between 1937 and 1960, it's somewhere in between.)

The earlier you claim Social Security, the smaller your monthly benefit will be.

Source: SSA, author.

For this reason and others, taking Social Security early is not a good idea for more people.

If you feel you filed too soon, you have options. You can suspend your benefit payments and allow them to continue to build up until age 70, though your monthly benefits will still be reduced based on how long you have already received them.

Another option, which is only available within 12 months of claiming Social Security, is to pay back the benefits you've received. It will then be as if you never claimed Social Security at all; your eventual benefits will grow as you delay them, and you can claim them at an age when they're likely to be most beneficial to you over your lifetime.

No matter what, the biggest mistake you can make when filing for Social Security is not being educated about your options. Take the time to learn them and make the decision that's right for you.

One common mistake people make when filing for Social Security retirement (or survivors) benefits is continuing to work without being aware of the potential effect on their benefits. If you begin collecting your Social Security benefits before your full retirement age (you can begin as early as age 62), you can earn up to $15,720in 2015 without losing any of your benefits. But for any income above those limits, $1 will be deducted from your benefits for every $2 you earn. Ouch, right?

In the year that you reach your full retirement age, things get much better. The earnings limit rises considerably to $41,880 (for 2015), and you'll lose only $1 in benefits for every $3 you earn above the bigger limit. Once you reach your birth month that year, you'll be free to earn as much as you can without any reduction in your benefits.

The situation isn't quite as bad as it seems, though. If you end up losing benefits for a certain number of months in a year, the Social Security Administration takes that into account and recalculates your future benefits as if you had waited that number of months before starting to receive Social Security, leading to higher payouts later. So in the long run, you might make back those lost benefits.

Dan CaplingerOne important thing many pre-retirees don't realize is that your decision regarding when to file for Social Security can have a huge impact on the benefits your spouse receives. Therefore what seems like a smart decision for you could be a mistake for your family as a whole.

On one hand, your spouse can't claim spousal benefits based on your work history until you file for your own retirement benefits. If you're full retirement age or older, you can file and immediately suspend your own benefits in order to make your spouse eligible for spousal benefits; but those who are younger than full retirement age have to file and actually receive benefits -- at a reduced rate -- in order for their spouse to receive spousal benefits. Therefore some will want to file earlier in order to get spousal benefits flowing as soon as possible.

On the other hand, when you file affects how much your spouse is eligible to receive in survivor benefits after your death. The survivor benefit is based on your actual benefit payment, reduced or increased to reflect whether you took benefits before or after full retirement age. Even those who might ordinarily want to claim early -- such as those who have a life-shortening medical condition -- should consider waiting in order to ensure higher survivor benefits for a spouse.

Social Security's rules are complex, but it's essential to consider its impacts on your spouse. Otherwise, you could end up making the wrong decision.

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Dan Caplinger has no position in any stocks mentioned. Dan Dzombak has no position in any stocks mentioned. Selena Maranjian has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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