Chances are, you're counting on Social Security to play a pretty significant role in your retirement. Maybe you expect to get a large chunk of your income from those benefits. Or maybe you're behind on savings and therefore plan to rely pretty heavily on them.
Unfortunately, Social Security may not end up being the generous income stream you'd expect it to be. In fact, here are three reasons why you may end up really disappointed with your benefits.
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1. Your monthly benefit may be lower than expected
Many people expect their monthly Social Security benefit to be the rough equivalent of what their paychecks provide. But that's not accurate at all. If you're an average earner, you can expect your monthly benefit to replace about 40% of your former paycheck, not your entire paycheck, and if you file for benefits before reaching full retirement age, you'll get even less money during your senior years.
To give you some context, the average Social Security recipient today gets $1,543 a month. In time, that average benefit is likely to rise as cost-of-living adjustments are implemented. But all told, you shouldn't expect your monthly benefit to get anywhere close to replacing your old paycheck.
2. Benefits may be cut universally
Social Security is about to have a cash crunch on its hands. In the coming years, the program will owe more in benefits than it collects in revenue as baby boomers exit the workforce in droves. That's a bad thing, because a shrinking workforce means less payroll tax collection, which is Social Security's primary revenue source.
Social Security does have trust funds it can tap to compensate for reduced revenue. But once those trust funds run dry, which could easily happen within the next decade and a half, the program may have to slash benefits to the tune of 24% (and that percentage could adjust over time, too). That means you may be in for even less money than you'd expect.
3. Your benefits may be subject to taxes
If Social Security is your sole or primary income source in retirement, you may be able to avoid federal taxes on your benefits (though keep in mind that 13 states impose their own taxes). However, if your provisional income is high enough, you'll lose a portion of your benefits to the IRS.
Your provisional income is essentially your non-Social Security income (including all tax-free income you're privy to, like municipal bond interest) plus half of your annual benefits. If that total falls between $25,000 and $34,000 and you're a single tax filer, or between $32,000 and $44,000 and you're a married couple filing a joint tax return, you could be taxed on up to 50% of your benefits. Furthermore, if your provisional income exceeds $34,000 as a single tax filer, or $44,000 as a joint filer, you may be subject to taxes on up to 85% of your benefits.
Prepare accordingly
The last thing you want to do is fall short on income during retirement because you were misinformed about Social Security. So don't let that happen. First, make a plan to save independently for your senior years, because even if Social Security doesn't implement cuts, your benefits still won't be enough to exist comfortably on. Next, figure out what your monthly benefit might look like. You can do so by checking your annual earnings statement, which will come in the mail if you're 60 or over. And if you're younger, you can create an account on the Social Security Administration's website and access your statement there. The closer you are to retirement, the more accurate that estimate will be, but even if you're younger, it's a good starting point to work with.
