Most retirees need income from Social Security to make ends meet. If you’re among the majority who will use these benefits to help support you in your later years, it’s important that you understand exactly what they’ll do for you. Sadly, it may be less than you think.
To avoid an unpleasant surprise when it comes to the retirement income Social Security will provide, it’s essential to know these four key facts that often catch seniors off-guard.
Nearly six-in-10 older adults believe Social Security will be enough to cover more than half of their total retirement expenses, according to a survey conducted by Nationwide. And over a quarter think their benefits will be sufficient to serve as their sole source of support and provide a comfortable retirement.
1. Your Social Security benefit may be smaller than you’re anticipating
The sad reality is, if you believe either of these two things, you’re going to be disappointed – and in a difficult financial situation if you made your retirement plans based on these misconceptions. See, Social Security is supposed to be just one of three sources of retirement income, along with savings and pension money. And your benefits are only meant to replace about 40% of pre-retirement funds, when the minimum you’ll probably need to replace is 70% to 80%.
When your Social Security benefit turns out to be much smaller than expected, you could find yourself struggling to live on an income that’s barely above the federal poverty level. Or if you try to maintain your standard of living but haven’t saved enough, you could drain your nest egg too quickly.
Don’t let that happen. Check your Social Security account online to get an idea of the amount of income your benefits will actually produce for you – and remember you’ll need income from other sources that are sufficient to replace around 40% or more of what you were earning before quitting work.
2. You could end up owing taxes on your Social Security benefit
Social Security benefits are earned benefits that you become entitled to because you pay payroll taxes throughout your lifetime.
Despite the fact that you’re paying taxes to support the program, you won’t find your IRS obligations have concluded after leaving the working world. In fact, there’s a very good chance you could end up being taxed on your Social Security checks.
This doesn’t become an issue until your countable income hits a certain minimum threshold ($25,000 for single filers and $32,000 for married filers). Countable income is half your Social Security benefits plus other taxable income and some non-taxable income. And you’re only taxed on between 50% and 85% of your benefit, depending on how much you earn.
Still, 50% of retirees end up paying out part of their yearly retirement income to the IRS, and that percentage will likely increase over time because the minimum thresholds at which benefits are taxed aren’t indexed to rise with inflation. You need to be prepared for the effects of these taxes, as they’ll reduce the amount of Social Security income you’ll have to live on.
3. Your full retirement age may be later than you realize
Another big problem comes from the fact that you may have to claim your benefits later than you’re anticipating in order to get the full amount of them.
That’s because you don’t get your standard benefit unless you retire at full retirement age (FRA). If you’re even a month early, you’re hit with early filing penalties. And less than a quarter of pre-retirees know when their full retirement age is, according to Nationwide.
Early filing penalties permanently reduce your checks to the tune of a 6.7% annual benefits cut for each of the first three years and an additional 5% per year cut if you retire more than three years before FRA. Sadly, future retirees on average believe they’re eligible to get their full benefit at 63, when full retirement age is actually between 66 and 67, depending on your birth year.
If you think you’ll be able to leave work in your early 60s and claim your full benefit, you’re going to be surprised to find yourself with far less income than you anticipated. And a full seven-in-10 adults believe they’re eligible for their standard benefit before they actually are, so a huge number of Americans are going to face this unpleasant reality.
To make sure this doesn’t happen to you, consider basing your retirement savings goals around the assumption that you’ll be claiming a smaller benefit early on. If it happens that you can work later, you’ll simply have a higher income than you expected – which is a lot better than having a lower one.
4. An automatic benefits cut could slash your benefits if lawmakers don’t act
Finally, future retirees need to come to terms with the fact that they’ll be getting less benefit money than they were promised if lawmakers don’t act quickly to solve Social Security’s funding crisis.
The problem is, the combined trust fund that supports Social Security retirement and disability benefits is going to run out of money in 2035, according to the most recent trustee’s report. When that happens, Social Security will be able to pay out around 76% of promised retirement benefits from money it’s collecting from payroll tax revenue – but no more. Future retirees, in other words, are dependent on lawmakers to shore up the program’s finances to prevent a 24% cut to benefits from happening in the next 15 years.
Sadly, even if lawmakers act, any fix could also result in a cut to benefits. So, there’s a very real likelihood that you’ll end up with even less than the 40% of your pre-retirement salary that these benefits currently provide.
Don’t get caught by surprise when it comes to Social Security
Your financial security is too important to put at risk by believing incorrect facts about Social Security. To make sure you aren’t unpleasantly surprised, it’s imperative that you’re realistic about what these benefits will do for you. Now you know the truth, so you can be ready.
