Are you tired of 2020? Many of us can't wait to put it behind us. But while you're in the process of forgetting this horrible year ever happened, you should also do yourself a favor and pledge to put these dangerous Social Security myths out of your mind. If you don't, they could destroy your retirement.
1. Social Security will replace your former paycheck
Nope. Not even close. If you're an average earner, your monthly benefit will replace about 40% of your pre-retirement wages, and most seniors need roughly twice that amount to comfortably keep up with their living expenses. In fact, the average beneficiary today only collects a little over $18,000 a year from Social Security. That's probably not enough for you to live on, so don't plan on doing so. Instead, make an effort to save diligently in a retirement account like an IRA or 401(k) so you have an additional source of income at your disposal once you stop working.
2. You have to sign up for Social Security once you reach full retirement age
Again, wrong. Your full retirement age is when you're entitled to collect your full monthly benefit based on your personal earnings history. That age is either 66, 67, or somewhere in between, depending on the year you were born. But you're allowed to delay your filing past that point, and doing so could work to your advantage. For each year you hold off on claiming Social Security, your benefits will increase 8%, up until age 70. And to be clear, that boost will remain in effect for the rest of your life.
3. Your Social Security benefits are yours to keep in full
You'd think Social Security income wouldn't be subject to taxes -- but you'd be wrong. At the federal level, whether or not those benefits are taxable boils down to your provisional income, which is your non-Social Security income plus 50% of your annual benefit. If that total lands between $25,000 to $34,00 and you're a single tax-filer, you may be taxed on up to 50% of your benefits. If that total exceeds $34,000, you risk taxes on up to 85% of your benefits.
If you're married filing a joint tax return, these thresholds are a bit higher. A provisional income between $32,000 and $44,000 opens you up to taxes on up to 50% of your benefits, and beyond $44,000, you could face taxes on up to 50% of your benefits.
In addition to federal taxes, there are 13 states that impose their own tax on benefits, and while some do offer exemptions for low or moderate income seniors, several don't. The point, therefore, is that you shouldn't assume you'll get to keep your entire Social Security benefit, because that may not be the case at all.
Read up on Social Security
Social Security is loaded with rules, and it's hard to keep track of how the program works. But the more knowledge you arm yourself with ahead of retirement, the better positioned you'll be to make the most of your benefits. And to kick things off, start by forgetting about these misconceptions, because if you buy into them, you really stand to struggle financially.