Social security provides a welcome income stream welcome to retirement, but you risk a rude awakening if you do not understand how the program works. There are many misconceptions, which is understandable because the program has changed over the years and other changes are coming.
But it's time to make things clear. Here are four of the most common misconceptions about social security that should be put to rest.
1. You receive your full social security benefit at age 65.
This was the case when social security was created and for many years after. But as funding for the program became increasingly difficult, the government began moving the goals. Today, the age of full retirement is between 66 and 67, depending on the date of your birth.
You can start Social Security as early as age 62, but you will receive a lower amount per check to reflect the extra months you receive benefits before your retirement age. If you start at age 62, you will receive only 70% or 75% of the benefits provided by check, depending on your retirement age. If you want the biggest check possible, delay benefits up to 70 years old if you can. Then you will receive 124% or 132% of your scheduled benefits by check, always according to your retirement age.
2. Social security is disappearing.
It's the most prevalent and most disturbing myth for adults who work today, but that's not true. Social security will always be there for you, your children and maybe even their children. That said, not everything is rosy.
The social security trust funds will be exhausted by 2035. At this stage, it will only be able to pay 80% of the promised benefits, unless the government makes changes. No one knows what these changes will look like, but here are some suggestions:
- Reduce profits
- Increase in the income ceiling subject to the social security tax ($ 132,900 in 2019)
- Social security tax rate increase (currently 12.4%, divided equally between employee and employer, unless you are self-employed)
- Reduce cost-of-living adjustments that help the value of social security to keep pace with inflation
- Raise the age of retirement
The government may choose a strategy or a combination of these strategies, but it is likely that social security will no longer be as useful in the future as it is today. Retirees will have to rely more on their personal retirement savings to make up the difference.
3. Social Security will cover all your retirement expenses.
This myth is much less widespread than that according to which social security will soon be a thing of the past. But in case someone still believes in it, it is not true and it has never been. The Social Security Administration only wanted Social Security to cover 40% of the average pre-retirement income of the average employee, although it does not say what average earnings are.
Low-income households may find that social security covers more than 40% of their retirement expenditure, but for most households it is likely to cover less than that, especially since its value will probably decrease over the next few years. next decades.
You can estimate your social security benefit in dollars today by creating a "my social security" account. Use this information and your estimates of your annual living expenses at retirement to estimate the percentage of your retirement income that Social Security will replace. Then make a plan to find the rest by yourself.
4. Social security benefits are free of tax.
This is another myth that was once true. When creating Social Security, the government had not imposed tax benefits, but this is no longer the case today. If your tax filing status is single, head of household, married separately or eligible widow and your annual income exceeds $ 25,000, you can pay taxes on your Social Security benefits. The same is true for married couples reporting together whose annual income exceeds $ 32,000.
The formula for calculating social security taxes is complex and goes beyond the scope of this article, but here is a detailed explanation if you are interested. Depending on the status of your tax return and your income, you can pay federal taxes on up to 85% of your social security benefits. Some states also impose social security benefits, although each state has its own income thresholds to determine when social security benefits are taxable.
This does not mean that you will lose all your benefits to the government, but it could increase your tax bill in retirement. You can take some steps to reduce your taxable income, for example using more Roth retirement savings or limiting your retirement expenses, but you will not always be able to avoid paying taxes on your social security benefits. In this case, your best option is to prepare yourself. Talk to a financial advisor or accountant if you are unsure of the impact of taxes on Social Security benefits.
Now that we've identified the truths from the lies, you can use this information to help you make informed decisions about when to start Social Security and the amount of your retirement savings that it will actually cover.