Social Security is complicated. That's unfortunate, since it will likely be an important income source, and you could end up costing yourself crucial benefits if you don't know the rules.
You don't want to make Social Security mistakes that leave you with less financial security in your later years, so be sure you aren't making these three big errors.
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1. Overestimating what Social Security will do for you
Expecting too much from Social Security is one of the biggest and most damaging mistakes future retirees make. If you think your retirement benefits are going to be enough to support you, you are very wrong, and you should correct course ASAP.
Here's the reality. Social Security replaces about 40% of pre-retirement income, even less if you're a high earner. No one can, or should, take a 60% pay cut upon retiring. So you must have a detailed plan for how you will bring in the other income needed to cover your costs.
Most experts anticipate you'll need to replace around 80% or more of pre-retirement earnings. If 40% of that comes from Social Security and you don't have a pension, the rest will need to come from your investment accounts -- unless you're confident you'll work part-time in retirement.
2. Underestimating the impact taxes can have on your benefits
Many people also don't really understand how Social Security taxes work, and this can be a big mistake if you're anticipating a higher after-tax income than you end up with.
The truth is, Social Security benefits are partly taxed once countable income equals $25,000 for single tax filers or $32,000 for married joint filers. Countable income is all of your taxable income, half your Social Security, and some non-taxable income. The $25,000 and $32,000 limits do not change to account for inflation, so many more seniors each year are taxed as benefits increase due to wage growth and cost of living adjustments.
If you live in one of the 12 states that tax Social Security benefits, you could lose even more money on top of what the IRS takes. So it's imperative you calculate your likely tax bill when confirming you have enough to live on if you retire.
3. Making inaccurate assumptions about when you'll file for your first check
Finally, far too many future retirees have overly optimistic plans for when they'll first get Social Security checks. Many people want to work, and wait to claim benefits, until their late 60s or even until 70, when the largest possible monthly payment becomes available.
However, life often gets in the way. If health issues or family issues force earlier retirement, or if you simply decide you just can't take going to work anymore, you could end up claiming Social Security sooner than you anticipated.
To be sure you don't end up with serious shortfalls, you'll want to recognize all of these realities about your retirement checks. You should ideally plan to have enough supplementary savings to support yourself with the Social Security benefit you claimed at 62, after applicable taxes are taken out of it. This will help ensure you are truly ready to retire without financial hardship.
