There's a good chance Social Security will end up being an important income source during your retirement. Maybe you'll use those benefits to pay your rent, or to cover your food, transportation, and healthcare costs. It's for this reason that you can't afford any unpleasant surprises with your benefits, so don't fall victim to the following shockers.
1. Permanently reduced benefits
You're allowed to file for Social Security as early as age 62, but you're not entitled to your full monthly benefit based on your earnings history until you reach full retirement age; if you claim it sooner, it will be reduced. Full retirement age is either 66, 67, or 66 and a specific number of months, depending on the year you were born.
Many seniors rush to claim Social Security the moment they're eligible, all the while mistakenly thinking that once they hit full retirement age, their benefits will be restored to their full amount. But that's just not how it works. If you claim benefits early, any reduction you face will remain in effect unless you manage to undo your filing and repay all of your benefits within a year. Beyond that point, if you file early, you'll be stuck with a reduced benefit for life.
Since Social Security is such an essential retirement income source, you may think you're entitled to your benefits without having to worry about the IRS taking a chunk of them. But you'd be wrong. Federal taxes may apply to your benefits depending on what your provisional income looks like. Provisional income is the sum of your non-Social Security income plus 50% of your annual benefit.
If that income lands between $25,000 and $34,000 and you're single, you face taxes on up to 50% of your benefits. And beyond $34,000 in income, you may be taxed on up to 85% of your benefits.
If you're married filing a joint tax return, a provisional income between $32,000 and $44,000 opens the door to taxes on up to 50% of your benefits; beyond $44,000, you could be taxed on up to 85%.
Furthermore, there are 13 states that impose their own tax on Social Security. Moving to one of them could result in less of a benefit for you.
3. Universal cuts
Social Security is facing a substantial revenue shortfall. In the coming years, it expects to owe more money in benefits than the payroll taxes it receives. And once the program's trust funds run out, recipients could be in line for as much as a 24% reduction in benefits.
Unfortunately, there's nothing you can do individually to prevent this from happening. What you can do, however, is pad your retirement savings so you have enough to compensate for a lower monthly benefit.
Stay in the know
The more you read up on Social Security ahead of retirement, the less likely you'll be to wind up surprised in a very unfavorable way. It also pays to stay current on Social Security news to see what lawmakers are doing to prevent benefit cuts and ensure the program's long-term viability.