When you make retirement plans, chances are good you'll consider your Social Security benefits as you set your budget. That's why it's crucial to have realistic expectations for how much income will come from your retirement checks.
You can't assume you'll get the full amount of your promised benefit, though. That's because it's very possible that you'll end up owing taxes on the money you receive -- especially if you live in one of 13 states.
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Why retirees in these 13 states risk losing more benefits
Although it may come as a surprise, both the federal government and your state could end up taking a part of your Social Security retirement checks and leaving you with less to live on.
While seniors throughout the U.S. need to be aware that the IRS takes a cut once provisional income exceeds $25,000 for single filers or $32,000 for married joint filers, people living in most places across the country don't have to worry about their state also wanting a piece of their monthly payments. But that's not the case for residents of these 13 locations:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- North Dakota
- Rhode Island
- Utah
- Vermont
- West Virginia
If you live in any one of these states, your local government taxes Social Security benefits for at least some seniors. Typically, only higher earners need to worry about losing part of their money because of this. But every senior who resides in one of these places must know the rules so they're prepared for taxes taking a bite out of their benefits.
Why is it so important to be aware if your Social Security benefits will be taxed?
Understanding the tax rules applicable to your Social Security checks is crucial because many retirees are on a fixed income and every dollar counts.
Retirement benefit checks are intended to replace only a small portion of pre-retirement earnings. Specifically, they're supposed to cover 40% of what you were earning, with savings and/or pension income providing the remainder of the 40% to 50% of the income you'll need to replace. Sadly, far too many people over-rely on Social Security or assume they can get by with benefits alone when that's really not the case. And this problem is exacerbated if you have to pay taxes out of benefit checks that are already too small.
Before you retire, take a careful look at exactly how far Social Security will go, compare that amount to your monthly expenses, and make sure your savings will provide enough additional funds at a safe withdrawal rate. If you find you'll fall short, you aren't really ready to retire, or you'll need to make some big changes such as downsizing your lifestyle.
If you don't have an accurate estimate of Social Security payments, you may assume you'll end up with more money than is actually available. When taxes on benefits reduce the amount you have left to spend, you could find yourself facing a damaging financial shortfall that causes you to drain your savings too fast or makes affording other essentials impossible.
By learning your state's tax rules, you can avoid this fate -- either by boosting your savings rate or even relocating to someplace where more of your Social Security money is yours to keep.
