In the course of preparing for retirement, there are certain things you'll need to do: sock money away in an IRA or 401(k), read up on healthcare costs, decide where you'll settle down during your senior years, and come up with a game plan for claiming Social Security.
But if you buy into the wrong information, you could end up botching your filing and regretting it after the fact, or making poor choices with regard to how much you save. Here are three Social Security myths with the potential to destroy your retirement.
1. You can live on your benefits alone
Many people assume they can fall back on Social Security once their time in the workforce is over, and so they don't push themselves to save. But if you expect Social Security to replace your entire paycheck, think again. Those benefits will, in a best-case scenario, replace about 40% of your previous income if you're an average earner. If that sounds like enough income for you to live on during retirement, then you may be all set. But chances are, that's not the case.
Many of your living expenses will rise (ahem, healthcare) or stay the same in retirement. A few, like transportation, may drop due to not having to commute daily. But for the most part, you should expect to need around 70% to 80% of your former paycheck to keep up with your bills as a senior, and if you don't have income outside of Social Security, you'll fall dangerously short.
2. It doesn't matter when you file
You're entitled to your full monthly Social Security benefit (which is based on your personal wage history) once you reach full retirement age, which falls between 66 and 67 depending on your year of birth. You're also allowed to claim Social Security beginning at age 62, which is the most popular age to sign up. Or you can delay your filing beyond full retirement age and boost your benefits by 8% a year in the process, up until age 70.
What all of this means is that it absolutely matters when you file. If you haven't saved well for retirement, delaying Social Security could be just the thing to make up for it. And if you don't expect to live a long life, filing as early as possible makes sense. Either way, put some thought into when you sign up, because it could have a huge impact.
3. Your benefits won't be subject to taxes
If Social Security is your sole retirement income source, you may get to keep your benefits in full. But if you have other income, the IRS may get a piece of those benefits.
To see if you'll be taxed on Social Security, you'll need to add up your provisional income, which is your non-Social Security income plus 50% of your annual benefit. You could be taxed on up to 50% of your benefits if your provisional income equals:
- $25,000 to $34,000 and you're a single tax-filer
- $32,000 and $44,000 and you're a joint tax-filer
Meanwhile, you could be taxed on up to 85% of your benefits if your provisional income exceeds these limits. Plus, there are 13 states that impose their own tax on Social Security, so either way, gear up for the possibility that your benefits won't be all yours.
The more you know about Social Security, the more efficiently you can plan for your senior years. Read up on the program so you don't fall victim to some of the myths that could set you up for failure.