Money traps to avoid while living on Social Security benefits

The Social Security Administration helps more than 71 million people nationwide, including retired persons, disabled individuals, and kids. Many people consider Social Security benefits as one of the prime financial assets apart from their homes. The steady monthly income stream provides financial stability to millions of seniors.

But still, it might be difficult for retirees to live comfortably solely on Social Security payments. Many incidents happen, which makes the situation challenging for people. To use your Social Security payment properly, it is essential to avoid common financial pitfalls. By avoiding such financial traps, you may protect your retirement income and increase your savings.

Here, I am discussing such money traps or financial planning mistakes that can hamper your retirement savings and income.

1. Not saving enough in retirement accounts

A significant money trap that can deplete your Social Security retirement funds is not saving enough for retirement during your working years. While setting up their retirement plan, many people believe that Social Security will be enough to support them in their golden years, but this often becomes one of the most critical retirement planning mistakes. Social Security is designed to provide a basic level of income, but it may not be enough to cover all your expenses.

To avoid falling into this money trap, it's crucial to start saving for retirement as soon as possible. Even small contributions early on can make a substantial difference in the long run. If your employer offers a 401(k) or other retirement plan, consider checking the contribution limits and take advantage of the company match.

Luciano Colos, Founder and CEO, PitchGrade added - “For those without access to a workplace retirement plan, opening an Individual Retirement Account (IRA) is a viable option. IRAs give you lucrative tax benefits that can boost your savings”.

2. Not setting emergency funds

Setting up an emergency fund is important when you plan for retirement. If you do not have one, you may need to spend more out of your Social Security money in case of an emergency. So, not having an emergency fund is one of the most risky retirement planning mistakes you make when you are on your Social Security payments.

Figure out the total amount you want to contribute monthly to the emergency fund. Practically, at least three to six months' worth of your monthly expenses will be a sufficient investment.

You must also determine where to save your emergency fund. Using a high-yield savings account for keeping your emergency money is best.

A high-yield savings account gives you more interest than a normal savings account. It will help your emergency fund grow more, and you may withdraw money when needed.

3. Not tracking your expenses

If you don't track your monthly expenses, you'll never know where you spend your Social Security money. As a result, you might overspend and ruin your household budget.

Tracking your monthly costs is one of the main aspects of a solid household budget. Tracking expenses will help you determine which expense category needs more funds and which doesn't.

4. Choosing the "Buy Now, Pay Later" option

People living on Social Security money have limited funds in hand each month. So, they also have limited purchasing power in terms of cash purchasing. As a result, they might tend to choose the option "Buy now, pay later" while shopping. Initially, you'll pay a small amount (a portion of the total price) and pay the balance amount without interest over a few weeks or months.

This option may increase your debt, as you might be paying late fees if you can't pay the balance on time. This may also be reported to the credit bureaus and harm your credit.

5. Carrying credit card balances

If you do not use your credit cards wisely, they can surely ruin your credit score. However, carrying an outstanding balance on your card can hurt your finances as well. Your credit card debts can generate interest when they remain unpaid after the due date. The growing interest on your debt also increases the total outstanding debt. People reaching their full retirement age and living only on the Social Security paycheck must not build up credit card debts. If possible, pay off your credit card bills within due dates and in full.

6. Paying multiple fees

Retired or seniors must avoid paying unnecessary fees, like late fees on loan payments or credit card bills, bank fees, and overdraft fees. Making on-time payments can make it easier to avoid the first two. If you review your savings account statement every month, you can avoid overdraft fees. But if your bank pushes you to pay other fees for the sake of maintaining the account, then it's high time you should change your bank.

Paying high fees after retirement can burn out your retirement income. If you deposit all the money from your Social Security paycheck into one of your retirement accounts, review your account balance and transaction details regularly. You may use online banking services or use your official banking app. Set up alerts for transactions and bill due dates.

Don't compare your tax payments with fees. Pay taxes if you have taxable income.

7. Become a co-signer for an irresponsible borrower

Co-signing a loan for a person is a big financial responsibility. It means you are responsible for paying back the loan if the borrower fails. This way, your credit score may get a hit.

If you must co-sign a loan for a dear one, verify if that person can afford to repay the loan on time.

8. Close unnecessary subscriptions

Review your credit card or bank statements, and identify and close unnecessary subscriptions. When you are on a tight budget, you might want to cut off additional subscriptions, such as gym memberships, magazines, expensive store memberships, etc.

9. Promote financial literacy against scams

Scammers usually target old, retired people whom they can easily manipulate. You never know which type of scammers may target you. Do your own research before making any financial commitment. Do not send your personal details, like your address, bank account number, credit card number, Social Security number, or others. Read online articles about scams and fraud and convey that information to others.

Retirees must be cautious of investment scams that promise high returns and can deplete their Social Security retirement funds. To avoid falling victim to these scams, it's crucial to promote financial literacy and educate retirees about common fraudulent schemes.

Ben Lau, Founder of Featured SEO Company, believes by providing examples and highlighting red flags, individuals can make informed decisions, conduct thorough research, and consult with financial advisors before investing. Increasing awareness and vigilance will help retirees protect their savings and avoid the devastating consequences of investment scams.

10. Keep an eye out for the overpayment trap

Seniors who get Social Security benefits sometimes get overpaid by the Social Security Administration. They normally know that fact years later when they receive mail from the Social Security Administration. The administration asks for repayment of the additional amount that they disbursed earlier.

The Social Security Administration is mostly responsible for this error. They often put the wrong information into the system or calculate benefits incorrectly. As a result, they disburse more money to the individuals and pay more than the full benefit.

If it looks like you're getting overpaid, then you should keep that money aside. At some point, the administration will mail you to retrieve that money. One million people are overpaid every year who live on Social Security payments. There's a good chance that you might be one of them. So, keep any records that you have sent to the Social Security Administration.

Make sure your details are up to date in the books of the Social Security Administration. For that, maintain detailed data of your past earnings and create your "My Social Security" account on the authorized website. From there, you can verify your past income and make sure it's correct. It is also wise to check if you are getting reduced benefits or full benefits. Don't forget to discuss your issue with a financial advisor if you need personalized advice.

Conclusion

The amount of money you receive from Social Security partially depends on the age when you begin collecting it. So, if you don't need the money from Social Security immediately, as per Eric Novinson, Founder of This Is Accounting Automation, “consider waiting a few years to collect it, if possible. This will ensure that more funds will be available if you live longer than you expect”.

If you are at your full retirement age and the individuals who live on just Social Security money each month, then it is the best time to take care of your funds. The above-mentioned money traps are harmful to your finances. Take preventive measures to avoid wasting dollars, and make yourself financially strong.

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