If you're counting on Social Security to help you make ends meet as a retiree, the last thing you want is for any of this retirement income to disappear. Social Security benefits aren't enough to live on under the best of circumstances, so if your checks shrink you could really end up in financial trouble.
The good news is that if you're aware of some common ways retirees end up losing benefits, you should hopefully be able to avoid them. In fact, here are four possible triggers that could lead to you lose out on some of your Social Security income.
1. If your provisional income is above taxable levels
One of the first big ways you could lose your Social Security benefits is if the IRS takes a piece of them. This can happen once "provisional" income exceeds a specific limit. Provisional income is a special method of calculating income. It includes:
- All taxable income, including distributions from traditional 401(k) accounts
- Some non-taxable income, including municipal bond interest
- 1/2 of your Social Security benefits
Once your countable income is higher than $25,000 as a single filer or $32,000 as a married joint filer, up to 50% of your Social Security benefits could be taxed at the federal level. And at a provisional income above $34,000 for single filers or $44,000 for married joint filers, up to 85% of benefits are taxed by the IRS.
Although many Social Security numbers change each year -- such as the average benefit and wage base limit -- the thresholds for taxation don't adjust to account for inflation. Sadly, this means federal taxes will take a growing chunk of benefits for an increasing number of retirees each year.
2. If you live in one of the 13 states that taxes Social Security benefits
Choosing the wrong location for retirement could also result in the loss of some Social Security income.
While the majority of states in the U.S. don't tax your retirement benefits, 13 do. If you live in one, part of your benefits could be taxed depending on income -- which means losing even more of your retirement money to the government.
The 13 states where this could become an issue for you include:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
Take a look at the specifics of the tax rules before you decide whether spending your later years in one of these places is worth the hit to your benefits.
3. If you work less than 35 years
Social Security benefits are designed to replace about 40% of pre-retirement wages. As a result, they're calculated using a formula that gives you benefits equaling a percentage of your earnings over your career.
The benefits formula involves calculating your monthly average wage over the 35 years your earnings were highest, after adjusting each year's income to account for wage growth. Unfortunately, averages are reduced considerably if any zeros are included -- and that's exactly what will happen if you have fewer than 35 years of work under your belt when you retire.
If you work just 30 years, for example, your average wages Social Security is based on would be calculated by including five years of $0s in your wage calculation. And the more years you fall short, the bigger the impact.
Of course, this 35-year rule can also work in your favor if you work longer than that and your income in some of these extra years is higher. The more years you work while earning a higher salary, the more lower-earning years are left out of your average. So if your salary has gone up over time, you may want to think about putting in a few extra years to get a benefits boost.
4. If you're late signing up for Medicare
Most retirees have Medicare premiums withdrawn from Social Security checks. A higher Medicare premium thus takes a bite out of your benefits.
Unfortunately, if you enroll late in Medicare, you could be hit with a premium penalty that lasts for the rest of your life. Understanding Medicare open rules and signing up on time can help you avoid taking this hit.
Understanding these four potential ways to lose benefits can help you to make a better plan for what income Social Security will provide. And in some cases, you may be able to avoid reducing your retirement checks. So be sure you make smart choices to preserve one of your crucial income sources in your later years.