in this video i cover the seven most common mistakes people make with social security they cost them thousands of dollars in retirement coming up next on holy schmidt holy schmidt social security is a complicated subject and knowing what to do or more importantly what not to do is key to maximizing your social security benefits this video covers the seven most common mistakes in my humble opinion that people make with social security that prevent them from getting every dollar that they're due stick around to the end because i'm going to debunk the biggest one of them all this single mistake alone can cost you thousands of dollars before we begin please make sure you click the like button youtube uses the thumbs up as its algorithm trigger to drive a video up in the search results and i want to help as many people as possible all right let's get into it mistake number seven not knowing the earnings limits if you're asking yourself what's an earnings limit pay close attention for the rest of you i'm going to make this very simple if you haven't reached full retirement age and for the sake of this video let's say that's age 67 the ssa will take back a portion of what they've given you in retirement benefits based on how much income you earn in 2021 for example if this isn't the year that you turn 67 the ssa will take back one dollar for every two dollars that you earn in excess of eighteen thousand nine hundred and sixty dollars for example if you earn forty thousand dollars in 2021 your social security benefits would be reduced by ten thousand five hundred and twenty dollars that's simply forty thousand dollars minus eighteen thousand nine hundred and sixty dollars divided by two in the year that you turn 67 the ssa is a little bit more lenient you have to repay one dollar for every three dollars that you earn in excess of fifty thousand five hundred and twenty dollars most people would rather wait and file for social security later and get the higher payment between five and eight percent depending on how many years past age 62 you wait then have to give a large portion of it back the next point is the spousal benefit the spouse can receive anywhere between thirty two and a half percent and fifty percent of the primary insureds for retirement age payment depending on the age of the spouse when he or she files what a lot of people don't realize is that the size of the spousal payment isn't tied to when the primary earner files for social security themselves only if they filed for social security so if they file early or if they file late it doesn't matter it's entirely based on the age of the spouse when he or she files for the spousal benefit point number five is pretty common and that is the we could all die tomorrow i'm filing at age 62 mistake this is a funny one because the logic is actually true anybody could die tomorrow but the math suggests that if you reach age 62 you're going to live to age 82 to 84 depending on if you're a male or female basically this comes about because somebody knows someone who passed away early and never was able to claim social security benefits or if they had claimed them they claimed them late and only had a few years of benefits paid to them and they've extrapolated that back to themselves and what could happen to them we don't actually know when we're going to pass unfortunately but as i said before if you've made it to age 62 the tape will say that you're likely to make it to age 82.
these people say they're going to live a life large and enjoy life while they still can rather than worry about what might happen in the future but i almost always get a different answer when i ask the question do you think you'd feel the same way at age 88 as you do at age 62. and just going through the math at age 62 you get 70 percent of what you would receive at full retirement age again age 67 and at age 70 if you wait until age 70 you get 124 percent of what you receive at age 67.
This means that the recipient receives 43 more at age 67 than they would at age 62 and 77 percent more at age 70. somewhere in there is the right age for you but it may not be age 62. i don't get into politics on holy schmidt it's just not good for business but i will point out one of the most common erroneous comments that are made here on the channel is that immigrants come to the united states for free social security that actually can't happen because to qualify for social security you need 40 quarters of earnings during your lifetime and those earnings have to be the type where you actually pay into the social security fund in other words they have to take out social security taxes they don't have to be consecutive quarters you could work for three months take the next three months off and then do the same thing again and again and again over 80 quarters but you do need 40 quarters that's 10 years of work history in order to qualify to get a social security check also you need to earn a certain minimum per quarter in 2021 that amount is fourteen hundred and seventy dollars in a single quarter it's a pretty easy number to hit so know that if you're not paying into social security for forty quarters you're going to miss the mark and not qualify to receive social security so check with the ssa and see what your work history looks like you don't want to miss it by three or six months point number three another mistake is to think that everybody gets paid the same social security payment in retirement they don't the ssa uses your earnings history and they use that to calculate what your social security payment is going to be and it's based on your best 35 years the theory is the more you earn the more you contributed to social security so the more you should get paid back from social security when you go into retirement for most people when they entered the workforce they didn't earn very much and so their contribution to social security would have been quite modest as time went on they got promoted they got raises and they continued to earn more this means if you're like most people your last few years of earnings and your contribution to social security during those years is a lot higher than your first few years of earnings and contribution so if you retire early you're probably leaving a higher payment on the table on the flip side if you have 35 good years of work history behind you and think you're going to continue to grow your social security payment by working part-time that's probably not actually true remember the ssa takes your best 35 years part-time work after 35 good years doesn't change the payment at all by the way if you don't have 35 years of work history the ssa will put zeros in for the remaining years to get you to 35 and use that as your base too many of those and your social security payment will drop significantly if you want to know more about this i have a video out on how to calculate your social security payment and i'll put a link in the description by the way i recently signed up for instagram i post information about social security there as well it's different information than what you see here it's short it's bite size it's very quick and easy to consume i'd love it if you follow me all you need to do is go over to instagram and look up the underscore schmidt list that's my handle and it's also called holy schmidt now back to the video point number two is understanding the taxes on social security using a calculation called provisional income the rules are on taxes and social security are quite confusing this is because there are actually two sets of rules there's the federal rule and there are the state rules and people often get those two confused let's start with an easy one let's start with the state rules currently there are 38 states in this country that don't charge income tax on social security if you live in one of those states remember that that doesn't mean the federal government doesn't charge income tax it just means that there's no state tax on your social security payment this is a big point of confusion with people and often the source of a surprise bill from the irs at the end of your first year of receiving social security benefits also if you don't live in one of those 38 states you might want to consider moving state tax on social security payments can be significant and with 38 states in this country willing to forgo receiving tax payments on your social security benefits there might be a better place for you to live now federal tax on social security the irs can tax up to 85 percent of your social security payment depending on what your provisional income is what is provisional income well it's the sum of your agi your adjusted gross income plus municipal bond interest plus foreign earnings that are not necessarily taxable here in the us plus your social security payment 50 of your social security payment if you add all that up and that totals more than the provisional income thresholds you owe the irs tax on a portion of your social security payment in 2020 the threshold was 32 thousand dollars for married couples a special note that drawing from a taxable retirement account like a 401k or standard ira does increase your adjusted gross income it increases your agi but withdrawing funds from a roth ira which come out tax-free does not increase your agi if you want to learn more about provisional income and how it's calculated i've included a link in the description for one of my other videos which covers this in great detail finally the one i told you about beginning point number one taking the funds at age 62 and investing them one of my most popular videos is entitled should you take your social security payment at age 62 and invest or wait until full retirement age i recorded this video because there are stalwart social security evangelists out there who swear by the fact that you should take your social security payment at age 62 and invest it and they say you'll always come out ahead and they say it with conviction so a lot of people believe what they're saying they almost always cite a five percent return on the investment and state that if they pass away early there is an account filled with an investment amount that they can pass on to their heirs usually it's their spouse sometimes it's their children so let me take you through the math you can check it on my website holy schmidt dot com forward slash 62 invest if you took social security at age 62 the average payment at least in 2021 for a 62 year old is 1189 at full retirement age in this case age 67 the payment is 1789 the difference is 609 1180 a month times 12 months times five years earning five percent per annum comes out to eighty thousand three hundred and sixty one dollars more at age 67 than if the recipient had waited until age 67.
so at age 67 they have 80 361 dollars sitting in a nest egg now assuming you still get five percent you can draw down 609 dollars per month that's the difference between the two payments at age 67 and come out ahead up until age 82 years and 10 months by the way the actuarial tables say that males live to age 82 on average and females live to age 84 on average if they make it to age 62 so it's about breakeven if you look at pure math of course some people will live longer and some people will live shorter but here's the problem at age 62 if you're not spending your social security payment how are you going to live are you going to work a few more years well if so remember the earnings limit because if you earn more than eighteen thousand nine hundred and sixty dollars in 2021 anyway you're going to have to give a portion of that money back let's say the answer is no and you're just planning on living off of your retirement savings so you're going to withdraw money from your 401k remember the last point on provisional income taking money from your 401k adds to your adjusted gross income and also makes your social security benefit taxable if it becomes too large also remember that these are your youngest of your retirement years and a lot of people want to do things like travel in the early stages of retirement and the limits set by provisional income probably won't let you do too much of that finally some of the age 62 evangelists talk about the time value of money but they've got it actually backwards let me explain they say that the big jumps you get the five to eight percent per year increases that you get aren't really that big because of the time value of money first let me point out that the five percent return that they all cite includes the time value of money you don't get five percent plus a tvm adjustment on top of that you sort of get it on your eleven hundred and eighty dollars because that payment is adjusted every year for inflation with something called cola that's the cost of living adjustment but if you check back at age 63 on the payment that you receive at 67 it's not 1789 anymore that forecasted payment also goes up with a cost of living adjustment and the same thing happens at age 64 65 and 66.
so unless you're planning on earning a higher return a higher return than five percent and a higher return means higher risk in order for this to work you'd have to not work past age 62 not draw income from taxable sources such as a 401k not live past 83 and be disciplined enough during all of that not to spend anything that you receive from the ssa oh and the five percent return in most cases you're gonna have to pay taxes on that if you'd like to see more of me please make sure you click subscribe notifications i work very hard to get what's happening out there in the world of social security and into here for you and by clicking subscribe notifications you'll get notified as soon as i post a video also check out this video on the average net worth of a 62 year old some of the numbers are quite remarkable some not so much this is jeff schmidt thanks for watching