9 Things Most Retirees Don’t Know About Social Security

RichLegg / iStock.com
RichLegg / iStock.com

Social Security is a valuable program that ensures retirees have some income to rely on in their golden years. However, many Americans don’t understand how it works.

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Just over two-third of soon-to-be retirees (ages 55 to 65) failed and another 18% earned a grade of D on a basic knowledge quiz about Social Security retirement benefits by MassMutual. Only 1% received an A+ by correctly answering all 12 true/false statements.

Knowing the ins and outs of Social Security will ensure you take full advantage of your benefits and avoid leaving money on the table. Here are facts about Social Security that you may not be aware of.

Social Security Isn’t Going To Disappear

It’s true that Social Security Trust Fund reserves are set to be depleted by 2035, and many Americans worry that there will be no benefits available by the time they retire.

“This fear causes many people — to their detriment, most likely — to start collecting benefits as soon as they’re able to so they can get it while it lasts,” said Taylor Jessee, a CPA, CFP and the director of financial planning for Taylor Hoffman Wealth Management.

However, Social Security is largely funded by payroll taxes, which will continue to be collected for the foreseeable future.

“I caution today’s retirees that Social Security is likely not going away any time soon,” Jessee added.

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Social Security Isn’t Enough To Live Off in Retirement

Most people cannot live on Social Security. On average, it will provide 30% to 40% of your pre-retirement income.

“Nonetheless, Social Security benefits are still valuable, so you’ll want to do whatever you can to maximize them,” said Jackie King, a financial advisor at Edward Jones.

The more you invest in a retirement plan such as a 401(k) or IRA, the more flexibility you’ll gain in managing your retirement costs, because you’ll have more sources of income to pair with Social Security.

“So try to contribute as much as you can afford to these plans,” King said.

Benefits Are Based on Your Highest 35 Years of Earnings

Are you worried that several years on a lower salary will negatively impact how much you receive in Social Security benefits?

The good news is that the formula for calculating your benefit is based on your 35 highest-earning years, as well as the age you begin taking Social Security, according to King. If you’re curious to know how much you’re projected to get, she said you can sign up to receive a yearly statement from the Social Security Administration that provides an updated estimate.

Your Personal Situation Matters More Than Your Age

The longer you wait to take Social Security, the more money you’ll receive.

You can claim it as early as age 62, for a reduced benefit. Waiting until your full retirement age means you’re entitled to your full benefit. Holding off until age 70 means you’ll get 132% of your full benefit.

But waiting as long as possible to claim your benefits isn’t always the best move.

“Your needs come first,” said Stephan Baldwin, founder of Assisted Living Center.

For example, he said, if your spouse died, filing for survivor benefits instead of waiting for full benefits may make more sense. So be sure to evaluate all your options.

You Can Claim Your Ex’s Benefits

Even if you’re no longer married, Baldwin said you may be able to claim spousal benefits. To qualify, your marriage must have lasted more than 10 years, you must be at least 62 and you can’t be remarried. You can also claim 100% of the survivors benefit if your ex-partner has died, Baldwin noted.

You Get To Keep the Bigger Benefit If Your Spouse Dies

If both spouses receive Social Security benefits, the smaller benefit goes away when one person dies. It doesn’t matter who dies first — the surviving spouse will begin receiving the larger of the two benefits.

“That is why couples should focus on increasing the higher benefit,” said Jeremy Keil, a retirement-focused financial planner with Keil Financial Partners and host of the Retirement Revealed blog and podcast. “It’s the one that will stay around longest and be there to help the widow(er).”

Some of Your Benefits May Be Withheld

If you claim your benefits before reaching full retirement age, are still working and make more than the yearly earnings limit, you may have some of your Social Security benefits withheld.

The cap is $21,240 for 2023, and you would lose $1 in benefits for every $2 in earnings above the max.

But you don’t really lose the benefit. “You won’t receive it while you are below full retirement age, but as soon as you hit that age, Social Security will recalculate and give you credit for those dollars,” Kell explained.

You Can Undo a Social Security Benefits Claim Decision

If you decided to claim your benefits and then realized you should have waited, the Social Security Administration allows you to withdraw your application for a one-time do-over.

“There are a host of reasons why someone may regret the decision to begin taking Social Security,” said Jordan Kahn, a CFA and chief investment officer for HCR Wealth Advisors.

For example, you could decide to take on a part-time job and no longer need the extra income. Or maybe you didn’t realize how much more money you could receive by waiting a couple more years.

“If a person makes this determination within 12 months of filing their initial application, they can stop receiving benefits and move forward as if they never claimed them,” Khan said.

But you would have to pay back any benefits you received during that time.

You May Have To Pay Taxes on Social Security Benefits

Many Americans pay taxes on their Social Security benefits. The exact amount you’ll need to pay depends on your total income.

“It does not take a lot of income for your benefits to be taxed,” Kahn said.

If you’re a single filer and earn between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If you earn more than $34,000, up to 85% of your benefits may be taxable. For joint filers, if you and your spouse have a combined income that is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $44,000, up to 85% of your benefits may be taxable.

In addition to paying federal income tax on your benefits, Kahn noted that 12 states also levy income tax on Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia.

If you’re worried about your tax bill in retirement, it’s a good idea to speak with a professional who can help you find ways to lower your taxable income.

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