3 Social Security Myths Retirees Still Believe – And What They Really Call It
Understanding how Social Security fits into your financial plan can lead to a comfortable retirement. But misconceptions about the program can set you back.
Using the wrong information to make important decisions about your Social Security benefits can be costly and leave you with a false sense of security. These are some of the biggest myths that can lead to major financial challenges.
Myth #1: You must apply ASAP
One Social Security myth is that you should always apply as soon as possible in case the money runs out. But claiming Social Security as soon as possible also means taking a small benefit. The longer you wait to get Social Security, the more you’ll get when it’s time to enter the program.
If you take out Social Security at 62, you can get up to $2,969 a month. However, waiting until 70 can result in $5,181 per month. Working a few extra years or bridging the gap between retirement and taking Social Security by tapping into a 401(k), individual retirement account (IRA) or other savings and investment accounts can pay off.
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Myth #2: Benefits are not taxed
The second Social Security myth is that your benefits are tax-free. Up to 85% of plan benefits can be included as taxable income.
The amount of your taxable benefits is based on your tax filing status and annual gross income. Gross income is determined by a complex formula that takes into account adjusted gross income, tax-free interest income and a portion of your Social Security benefits.
Your benefits are not taxed by the federal government if your income, including benefits, is less than $25,000 per year ($32,000 for married couples filing jointly). It’s up to 50% of your taxable income if your income is from $25,000 to $34,000 ($32,000 to $44,000 for married couples) and 85% of your taxable benefits if your income exceeds $34,000 ($44,000 for married couples). Some states levy Social Security taxes.
Keep in mind that withdrawals from a traditional retirement account will boost your average income and may put you in a higher tax bracket. That’s why some retirees take money out of their retirement plans before they go into Social Security to reduce their overall tax burden.
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Myth #3: Your benefits will definitely cover your costs
The last myth about Social Security is that your benefits will be enough to cover your living expenses in retirement. Social Security should be part of your retirement plan.
Building a strong nest egg will help. One rule of thumb is to aim to save at least 15% of your pre-tax income each year for retirement. It’s also important to take advantage of your employer’s matching 401(k). You can also make catch-up contributions to retirement accounts once you turn 50.
Some people end up going back to work after retirement when they realize that Social Security is not enough. Keeping a detailed budget can help reduce your expenses and make it easier to invest more of your money. Monitoring your finances can prevent you from falling into two common traps: undersaving and overspending.
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