Many Americans look forward to the day they'll collect Social Security and consider the benefits from this entitlement program an important component of their retirement plans. But while you can likely count on some Social Security benefits to be available when you hit your later years, there may be a few unpleasant surprises in store for you if you don't really know how they'll work.
In particular, here are three big things about Social Security you may not expect that could have a profound effect on your future.
1. Your benefits are only meant to replace 40% of pre-retirement income
If you're expecting Social Security to be your sole source of income, you're going to be very disappointed. Most experts believe you'll need at least 70% to 90% of pre-retirement earnings to maintain your standard of living when you quit work, and many seniors actually end up spending more post-retirement than when on the job.
Unfortunately, Social Security is designed to replace just 40% of pre-retirement earnings, so that will leave you with a significant shortfall without supplementary savings to make up the difference.
2. Your benefits will shrink if you claim them early
You can claim Social Security as early as the age of 62, and many retirees make this choice while operating under the incorrect assumption their benefits will go up later when they hit their full retirement age (FRA). The fact is, your standard benefit is available only if you first claim it at FRA (which is between 66 and 67). And if you reduce that benefit by incurring early filing penalties due to starting your benefits sooner, it will never get bumped back up again.
Early filing doesn't always mean you'll get less lifetime benefits -- it depends on how long you live. But for the majority of retirees, the financially optimal move is actually claiming benefits at 70, rather than claiming them early. By waiting past FRA until 70, you'll max out delayed retirement credits that raise your benefits and, if you live longer than your projected lifespan, you'll get more lifetime money from Social Security.
3. Your benefits could be taxed
Although it may come as a shock, your Social Security benefits aren't always tax-free. In fact, around 50% of retirees pay tax on their benefits, and depending on your income, you could be taxed on up to 85% of your Social Security benefits by the federal government. A minority of states will also take a piece of your Social Security check for taxes, leaving you with less money to live on than you planned.
All of this adds up to the fact that you need to be prepared for a much smaller benefit than you're anticipating -- especially if you end up claiming Social Security at the age of 62 due to a job loss, family circumstances, or other issues outside of your control. You don't want to be caught off guard by these unpleasant surprises, so make sure you know the realities and have plenty of money saved to supplement the income that Social Security provides.