3 Social Security Mistakes That Could Sorely Wreck Your Retirement

Key Points

• It's important to claim Social Security at the right time.

• Don't assume the program's cost-of-living adjustments (COLAs) will fully do their job.

• If you retire on just Social Security, you may be in for a world of financial stress.

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

It would be more than fair to say that Social Security plays a big role in many people's retirement finances. Even though the average retired worker today only gets about $2,000 a month , Social Security serves as a critical income stream for many older Americans.

But if you're not careful, the wrong decisions in the context of Social Security could seriously ruin your retirement. Here are three mistakes you should make a point to avoid.

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1. Filing too early

The earliest age to sign up for Social Security is 62. But you won't be eligible for your monthly benefits without a reduction until you reach full retirement age, which is 67 if you were born in 1960 or later.

For some people, claiming benefits early makes sense. You should absolutely consider signing up for Social Security as early as possible if you have major health issues and don't expect to live a very long life. You may also have to claim Social Security early if you're laid off prior to full retirement age with no other income.

But if you don't have a pressing reason to claim Social Security early, you may want to consider filing at full retirement age, or even beyond. For each year you delay your claim past that point, until age 70, your benefits get to grow 8%.

Retirement has a sneaky way of being more expensive than people realize. Reducing your Social Security checks with an early claim could leave you struggling to pay your bills.

2. Banking on COLAs to help you beat inflation

Each year, Social Security benefits are eligible for a cost-of-living adjustment, or COLA. The purpose of COLAs is to help Social Security recipients keep up with their bills as inflation drives living costs up.

You might assume that Social Security's COLAs will help you stay ahead of inflation. But that's not what they're designed to do.

Rather, Social Security COLAs are simply supposed to match inflation. If you're having a hard time keeping up with your bills in any given year, you shouldn't expect the following year's COLA to improve your financial situation. A more effective way to do that is to boost your non-Social Security income by working, or to cut back on spending somehow.

3. Assuming you can get by on Social Security alone

Many people reach retirement with no options for generating income outside of Social Security. It's one thing to have that happen due to tough circumstances like an illness that limited your earnings potential or ate up a lot of your savings. It's another thing to ignore the need to save because you've got Social Security to fall back on.

If you earn an average paycheck, you can expect Social Security to replace about 40% of it in retirement. But that means taking a pretty large pay cut.

It's common for seniors to need 70% to 80% of their pre-retirement income, sometimes more, to live comfortably. So it's a bad idea to actively plan to retire on just Social Security. Instead, try funding an IRA or 401(k) plan, even if you have to work a side hustle to come up with the money.

It's important to make savvy choices in the context of Social Security. Aim to avoid these mistakes so your retirement isn't filled with regret.

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