Don’t Let These Social Security Myths Derail Your Retirement
Dear Rich Lifer,
When most people think of Social Security benefits, they think of retirement benefits paid to the elderly.
However, there’s a lot more to Social Security than you may realize. For instance, Social Security also pays disability benefits, benefits to dependents of retired or disabled workers, and benefits to survivors of deceased workers.
This year alone, the Social Security Administration says about 65 million Americans will receive over one trillion dollars in Social Security benefits.
Of the 65 million Americans receiving benefits, 45 million are retired workers. If you’re part of the majority who will receive benefits to help support your retirement plans, it’s best you understand what Social Security can and can not do for you.
Sadly, too many Americans are blind-sided by four common misconceptions about Social Security we’re going to uncover today. Don’t let these misconceptions derail your retirement.
Misconception #1: Your Social Security benefits will be enough to cover most of your retirement expenses
According to a survey conducted by Nationwide, nearly six-in-10 older adults believe Social Security will be enough to cover more than half of their total retirement expenses. The truth is Social Security benefits are only meant to cover about 40 percent of pre-retirement income, yet the minimum you’ll likely need to replace is closer to 70 or 80 percent.
Social Security is supposed to be just one of three sources of retirement income, including savings and pension money.
Expect your Social Security benefit to be much smaller than you expect. Otherwise this could be an unwelcome surprise that leaves you struggling to pay your bills or depleting your nest egg too soon.
Instead, check your Social Security account online to gauge how much income your benefits will provide you. And of course plan to have other sources of income to help offset your retirement expenses.
Misconception #2: You don’t owe taxes on your Social Security benefit
You’re entitled to Social Security benefits because you’ve paid payroll taxes throughout your life. But that doesn’t mean you won’t have to keep paying taxes on your Social Security checks once you’re retired.
The IRS looks at your countable income which is half your Social Security benefits plus other taxable income and some non-taxable income. If your countable income is more than $25,000 as a single filer and $32,000 as a married couple, you will need to pay federal income taxes on part of your Social Security income.
Individuals with a combined income between $25,000 and $34,000 are taxed on 50 percent of their Social Security benefit. If your combined income exceeds $34,000, 85 percent of your Social Security income could be taxable.
As of today, 50 percent of retirees don’t get to keep their full Social Security benefits. This number is only going to rise as minimum thresholds which benefits are taxed on are not indexed to rise with inflation.
Prepare to owe taxes on your Social Security benefits so you’re not caught off guard. But, there are some things you can do to hold on to more of your benefits. If you’re still saving for retirement, we suggest opening a Roth IRA since your withdrawals don’t count as taxable income. Second, consider relocating to a state that doesn’t tax benefits.
Misconception #3: Your full retirement age may be later than you think
According to Nationwide, less than one quarter of pre-retirees know when their full retirement age is. This is relevant because you only get your full amount of benefits if you claim at your full retirement age.
Even if you’re a month early, you’ll get hit with early filing penalties that can cost you 6.7 percent of your annual benefits for each of the first three years and an additional 5 percent per year if you retire more than three years before your full retirement age.
Unfortunately, pre-retirees on average believe they’re eligible for their full benefits at age 63, when in reality full retirement age is between 66 and 67, depending on your birth year.
As you can imagine, a lot of retirees are surprised to find their Social Security income is far less than they anticipated. Don’t let this happen to you, start saving with the assumption that you will be claiming before your full retirement age.
If you end up working longer than you anticipated, you’ll have more income from Social Security than you expected – which is a lot better than not having enough.
Misconception #4: Social Security benefits will be around forever
According to the most recent Social Security trustee report, Social Security retirement and disability benefits are going to run out of money in 2035.
When that happens, Social Security will only be able to pay out around 76 percent of promised benefits that it collects from payroll tax revenue. This leaves future retirees having to rely on lawmakers to boost the program’s finances to stop a 24 percent cut to benefits from happening in the next 15 years.
The bad news is even if lawmakers find some money, there will most likely still be cuts. Which means you’ll have less than the 40 percent of your pre-retirement salary you’re supposed to have today.
That said, no one can predict the future, but it’s worth noting to ensure you plan accordingly. There’s no reason you should be caught off-guard by any of these four misconceptions anymore.
To a richer life,
The Rich Life Roadmap Team