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Don't Let These 4 Social Security Surprises Ruin Your Retirement

By Chuck Saletta – Updated Sep 7, 2021 at 10:39AM

Key Points

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Although the program might seem simple, Social Security has a few surprises that might cause you problems if you're not prepared for them.

Social Security is the foundation of many Americans' retirement plans. Despite its importance to so many people, the program's design and funding mechanisms serve up plenty of potentially unexpected twists that could catch you by surprise if you're not careful.

By knowing about these twists in advance, before you sign up to collect your benefits, you can give yourself your best chance to prepare and work around them. So don't let these four Social Security surprises ruin your retirement. Instead, get yourself ready to tackle them head-on. That'll give you a better shot at the financially comfortable golden years you've been hoping for.

Older man looking at bills, worried.

Image source: Getty Images

1. Your real benefit will likely be below your headline estimate

If you have created an online My Social Security account with the Social Security Administration, the website will generate a custom statement for you with your estimated benefit amount. At the top of the page, there's a headline number with an estimate of what you might collect at your full retirement age.

Deeper in the statement, some of the assumptions in that model are discussed. Key among them is that to receive that benefit amount, you'll need to keep working and earning about the same amount between now and when you reach your full retirement age.

Age 62 is the most popular to start collecting retirement benefits, but full retirement age for those who haven't reached it yet is currently between 66 and 67 depending on the year they were born. Benefits are reduced for those who collect early. In addition, the workforce participation rate starts dropping off once people pass age 55 or so, which could add $0 income years to your benefit calculation. As a result, there's a good chance that what you'll actually receive will be below Social Security's headline estimate.

2. You can lose $1 of benefits for every $2 you earn

In addition to the reduction in benefit level for starting early, if you start collecting before your full retirement age and are still working, you'll face a stiff penalty. In 2021, that penalty can be as much as $1 of forfeited benefit for every $2 you earn from work above $18,960.

Between the reduction for starting early and the penalty for working while collecting, the message is clear: Don't collect Social Security if you're below your full retirement age and still earning a paycheck. While you will start getting that penalized money back once you reach full retirement age, the reduction in benefits for starting early is permanent.

3. The program's trust funds will empty within about 13 years

Earlier this month, Social Security's trustees issued their annual report on the condition of the program. As anticipated by its updated projections last November, this year's report shortened the remaining life expectancy of the Social Security Trust Funds by two years. It lost one year from the simple passage of time, and another year from the pandemic. As a result, the program's combined trust funds are now expected to empty by 2034.

When the program's trust funds empty, Social Security will only be able to pay out benefits based on the taxes it receives. The trustees estimate that would mean an immediate reduction of 22% to benefits and a long-run deficit of around 26%.  Or in other words, absent a change to the law, Social Security recipients can expect a substantial cut in benefits in a little over a decade from now.

4. Even that timeline may be generous

Unfortunately, there's good reason to believe that Social Security's trust funds are on track to empty even sooner than that. In particular, the inflation rates that Social Security's trustees used to model the program's future performance are laughably below recent inflation levels.

The trustees used a 2.4% inflation rate in their baseline estimate, and even their high inflation scenario went no higher than 3%. Recent inflation has been running around 5.4%, more than twice the trustees' baseline estimate. 

Inflation will likely accelerate the emptying of the Social Security trust funds. This is because benefits are indexed to inflation, while the trust funds are limited to investing only in U.S. Treasuries. That investing limitation means that Social Security's returns are currently limited to around 2.4%, which is well below that recent inflation rate.

Rising costs combined with limited returns means even more stress on the Social Security trust funds. As a result, unless the recent inflation rates truly turn out to be transitory, those trust funds could very well empty before 2034.

Plan around these to improve your chances of a comfortable retirement

The average retiree currently gets around $1,557 per month in benefits from Social Security. Even with these surprises, all signs point to the program being able to provide typical benefits within a few hundred dollars per month of that level for the foreseeable future. As a result, you can probably count on something from Social Security, even if it's not as much as you might have hoped.

The good news, though, is that the worst of Social Security's challenges are likely to be a bit more than a decade away. As a result, you've still got time to build a plan to cover any costs you had originally hoped Social Security would cover above and beyond what it actually likely will. But time -- and inflation and the pandemic -- keep moving forward, bringing that future ever closer. So get started now, and build a plan that helps you cover these Social Security surprises.

Chuck Saletta has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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